COMMITTEE ON WAYS AND MEANS CHARLES B.  RANGEL, New York, Chairman
FORTNEY PETE STARK, California SANDER M.  LEVIN, Michigan JIM MCDERMOTT, Washington JOHN LEWIS, Georgia RICHARD E.  NEAL, Massachusetts MICHAEL R.  MCNULTY, New York JOHN S.  TANNER, Tennessee XAVIER BECERRA, California LLOYD DOGGETT, Texas EARL POMEROY, North Dakota STEPHANIE TUBBS JONES, Ohio MIKE THOMPSON, California JOHN B.  LARSON, Connecticut RAHM EMANUEL, Illinois EARL BLUMENAUER, Oregon RON KIND, Wisconsin BILL PASCRELL JR., New Jersey SHELLEY BERKLEY, Nevada JOSEPH CROWLEY, New York CHRIS VAN HOLLEN, Maryland KENDRICK MEEK, Florida ALLYSON Y.  SCHWARTZ, Pennsylvania ARTUR DAVIS, Alabama	JIM MCCRERY, Louisiana WALLY HERGER, California DAVE CAMP, Michigan JIM RAMSTAD, Minnesota SAM JOHNSON, Texas PHIL ENGLISH, Pennsylvania JERRY WELLER, Illinois KENNY HULSHOF, Missouri RON LEWIS, Kentucky KEVIN BRADY, Texas THOMAS M.  REYNOLDS, New York PAUL RYAN, Wisconsin ERIC CANTOR, Virginia JOHN LINDER, Georgia DEVIN NUNES, California PAT TIBERI, Ohio JON PORTER, Nevada
Janice Mays, Chief Counsel and Staff Director Brett Loper, Minority Staff Director
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records of the Committee on Ways and Means are also published in electronic form.  The printed hearing record remains the official version.  Because electronic submissions are used to prepare both printed and electronic versions of the hearing record, the process of converting between various electronic formats may introduce unintentional errors or omissions.  Such occurrences are inherent in the current publication process and should diminish as the process is further refined.

Advisory of March 7, announcing the hearing

WITNESSES

The Honorable Kenneth E. Bentsen, Jr., President, Equipment Leasing and Finance Association, Arlington, Virginia

Greg Heaslip, Vice President - Benefits, PespsiCo, Inc., Purchase, New York

Kenneth R. Petrini, Vice President - Taxes, Air Products and Chemicals, Inc., Allentown, Pennsylvania, on behalf of the National Association of Manufacturers

Edward D. Kleinbard, Partner, Cleary Gottlieb Steen & Hamilton LLP, New York, New York, on behalf of the Securities Industry and Financial Markets Association

SUBMISSIONS FOR THE RECORD

American Bankers Association, statement

American Bar Association Section of Taxation, statement

American Benefits Council, statement

Association for Advanced Life Underwriting, statement

ERISA Industry Committee, statement

Financial Services Roundtable, letter

Hogan & Hartson LLP, statement

HR Policy Association, statement

Richard D. Ehrhart, statement

Statement of Air Products and Chemicals, Inc., Allentown, PA, statement

U.S. Chamber of Commerce, statement

Working Group for Certainty in Settlements, statement

HEARING ON THE REVENUE-INCREASING MEASURES IN THE
"SMALL BUSINESS AND WORK OPPORTUNITY ACT OF 2007"

U.S. House of Representatives,
Committee on Ways and Means,
Washington, D.C.

The Committee met, pursuant to notice, at 10:15 a.m., in room 1100, Longworth House Office Building, Hon. Charles B. Rangel (Chairman of the Committee), presiding.

[The advisory announcing the hearing follows:]

Chairman RANGEL.  Good morning.  As you know, we are supposed to be going to conference with the Senate on the minimum wage bill.  This Committee did provide a $1.3 billion tax relief bill for small businesses.--

However, even though there is no indication when we are going to conference, they have begun an $8.6 billion tax bill, and many of the Members of this Committee have been approached by people who would be affected by the provisions in the tax code they have suggested would pay for the $8.6 billion.

Since when we go to conference, these issues would be in contention, the ranking Member and I thought that the Members of the Committee should have a better understanding of what we will be faced with in the conference.  So, I look forward to hearing from the witnesses, and it's with great pleasure that I yield to the ranking Member, Mr. McCrery, for opening remarks.

Mr. MCCRERY.  Thank you, Mr. Chairman.  Thank you, in particular, for calling this hearing today to explore several tax increases recently passed by the Senate in conjunction with an increase in the minimum wage.

My position on the small business tax relief bill is well-documented.  I have told virtually anyone who will listen that Congress needs to provide more tax relief to small businesses, in particular, to help offset the cost of the minimum wage increase.  These small businesses are crucial to the growth of our economy.

As the Congressional Budget Office pointed out, a minimum wage increase will impose, over the next five years, a burden on employers of more than $16 billion.  Thus, it would be my preference to see an even larger tax package than the one approved by the House last month.  I would even like the total amount of relief to be greater than the $8 billion in the Senate-passed bill.

We cannot ignore the requirements imposed upon us by the new pay-as-you-go (PAYGO) rules.  Early experience with these rules suggests to me that avoiding an ill-advised tax increase can be just as important, and sometimes maybe even more so, than an acting on desirable tax relief.  Today's hearing will give us an opportunity to hear directly from some of those who would be most effected by the revenue-raising proposals in the Senate-passed bill.

I look forward to gaining a better understanding of the impact of these items, and I yield back the balance of my time.

Chairman RANGEL.  Our first witness would be the Honorable Kenneth Bentsen, president of Equipment Leasing and Finance Association (ELFA), from Arlington, Virginia.  Thank you.

STATEMENT OF HON. KENNETH E. BENTSEN, JR., PRESIDENT, EQUIPMENT LEASING AND FINANCE ASSOCIATION, ARLINGTON, VIRGINIA

Mr. BENTSEN.  Thank you, Mr. Chairman, Ranking Member McCrery, and Members of the Committee.  Mr. Chairman, I would ask that, if I could, summarize my statement to stay within the 5 minutes.

I appreciate the opportunity to present the views of ELFA on the proposal contained in the Senate-passed version of H.R. 2, the Small Business and Work Opportunity Act of 2007, that we believe would retroactively impose taxes on certain cross-border leasing transactions.

The ELFA is a trade association representing 770 members, including banks, financial services companies, and manufacturers in the equipment finance industry.  Our members are engaged in a broad sector of commercial finance, including business-to-business leasing and financing of capital equipment and software.  Our industry's members are the major financiers of transportation, manufacturing, mining, medical, office, construction, information, and technology equipment, and our members' customers include Fortune 100 companies, small and medium-sized enterprises, and State and local governments.

Nearly three years ago, Congress passed the American Jobs Creation Act of 2004 (P.L. 108-357).  As part of that legislation, and in response to concerns regarding certain domestic and cross-border leasing transactions, Congress created a new section of the tax code, Internal Revenue Code section 470, which applies a passive-loss type regime to certain leasing transactions involving property used by governments or other tax-exempt entities.

Importantly, in 2004, Congress recognized a sweeping change in law as a policy change, and decided on a prospective effective date which applies to the new rules to leases entered into after March 12, 2004. 

Moreover, the conferees specifically decided that no inference is intended regarding the appropriate present law tax treatment of transactions entered into prior to the effective date, namely that no intent was given with respect to the appropriateness of transactions entered into that prior effective date.

To go back now and retroactively change the agreement is, in effect, reopening the conference negotiations between the House and the Senate three years later, and creating double jeopardy for taxpayers.  The proposal in the Senate version would undermine the decisions made by the conferees of the Jobs Act, and retroactively change the effective date for cross-border leases entered into on or before March 12, 2004.

Specifically, the Senate proposal would reach back and impose taxes that could never have been expected on transactions that were completed years before the original jobs act was ever contemplated.  Indeed, under recently issued Financial Accounting Standards Board (FASB) guidance, any change of the timing of cashflows caused by changes in the tax treatment of a lease will require recalculation of earnings dating back to the inception of the lease.

As a consequence, the Senate provision would result in significant new tax liabilities on U.S. taxpayers, as well as significant adverse financial statement consequences caused by such recomputations for those affected U.S. companies which are publicly listed.

Additionally, as crafted, the provision would result in consequences for transactions never targeted by the proponents or the Government.  As an example, one of our members States that the proposed retroactive change in section 470 would eliminate net deductions for tax years 2007 and beyond on a number of lease transactions entered into years ago that the Internal Revenue Service (IRS) does not consider abusive.

The Committee on Ways and Means appropriately rejected the Senate proposal earlier this year in developing the House version of the Small Business Tax Relief Act of 2007.  In fact, Mr. Chairman, you wisely stated that such retroactive tax changes were "bad policy.''

We also believe that this provision undermines taxpayer due process.  Proponents of the provision have asserted that the provision would be beneficial to the IRS in litigation efforts against certain U.S. taxpayers involved in such transactions.  Ultimately, any legal issues surrounding the transactions completed prior to the Jobs Act effective date would be--should and will be properly addressed by the IRS in the courts on the basis of the laws that were in effect at the time of the transactions.

On due process grounds alone, U.S. taxpayers deserve to have their day in court, without interference from the Congress, before any judgement has been rendered.  To date, there have been no judgements involving such cross-border transactions.

Furthermore, nothing in the Senate provision would preclude--nor could the taxpayer expect--that the Government would discontinue to pursue a case against the taxpayer, as such cases relate to tax treatment of prior years.  If this is allowed, there is no reason Congress could not simply retroactively change the law and favor the IRS on any issue the IRS is currently challenging in the courts, or otherwise.  This is not the way our U.S. rule of law works, and it's not a change this Committee should endorse.

With all due respect to the proponents, I would submit to the Committee that the issue before the congress is not the merits of the underlying transactions in question, as many of those are properly being reviewed by the IRS on independent facts and circumstances, just as Congress intended. 

The real issue is one of policy and process, the use of retroactive tax law changes to raise revenue, as the Senate version of H.R. 2 clearly does, and the due process rights of taxpayers, which the Senate bill undermines.  We believe such actions are fundamentally unfair and unwise. 

[The prepared statement of Mr. Bentsen follows:]

Chairman RANGEL.  I thank the former Member from Texas, and welcome back to the House of Representatives.

Mr. BENTSEN.  Thank you, Mr. Chairman.

Chairman RANGEL.  The Chair recognizes Greg Heaslip, from the great State of New York, and the great firm of PepsiCo and its very progressive way in which you are handling the retirement problems of the employees. 

We may be calling you back to assist us in giving aid to other multi-nationals to see how we can best protect our employees.  Welcome to the Committee on Ways and Means.

STATEMENT OF GREG HEASLIP, VICE PRESIDENT, BENEFITS, PEPSICO, INC., PURCHASE, NEW YORK

Mr. HEASLIP.  Thank you, Chairman Rangel, Ranking Member McCrery, and Members of the Committee, for the opportunity to discuss executive compensation proposals contained in the Senate's Small Business Work Opportunity Act of 2007.

PepsiCo is a leader in the food and beverage industry.  We employ over 155,000 people, worldwide, 60,000 in the United States in over 400 locations.  Our employees are in every congressional district in America, and I hope you are familiar with some of our brands, which include PepsiCola, Frito-Lay, Quaker Oats, Gatoraid, and Tropicana.

At PepsiCo, we are proud of our overall approach to employee compensation and benefits, including our practices in the area of retirement plans and savings.  We offer a variety of broad-based programs to ensure that employees who spend a career with our company and perform consistently well can retire with secure lifetime income.

These programs include a traditional defined benefit plan, which is well funded, and a 401(k) plan with a company match that increases with tenure.  In combination, these programs achieve our goal of providing retirement security of 70 to 80 percent of pre-retirement income to career employees.

Now, as big as these programs are, a challenge facing many of our employees is that as their earnings increase, qualified plans and social security replace less and less of their pre-retirement income.  This is due to internal revenue code limits on qualified plan benefits, and limits on social security benefits.

Consequently, non-qualified plans and personal savings play a more and more important role in achieving retirement security, as earnings increase.  In response to these challenges, PepsiCo has instituted non-qualified savings and retirement programs, which are subject to internal revenue code section 409A.  These plans restore benefits to employees affected by qualified plan limits, and encourage employees to save for retirement.

While it appears that the Senate bill is aimed at top executives, its applicability goes far beyond.  At PepsiCo, the bill would impact over 1,000 employees, and the individual impacts would be harsh and inequitable.  At the same time, we see little benefit to shareholders or to the Government, from a revenue perspective.  Allow me to provide three specific examples of the problems the Senate provisions--proposals--would create.

The first is with respect to a restoration plan for defined benefits.  PepsiCo sponsors a non-qualified restoration plan that mirrors its qualified pension plan.  It is designed to treat employees equitably by restoring benefits that are lost due to qualified plan limits.  In our qualified pension plan, as in many traditional defined benefit plans, the value of an employee's pension increases significantly when they become eligible for early retirement.

At PepsiCo, this step up in benefit value generally occurs at age 55.  The same feature is mirrored in our non-qualified plan.  The Senate's proposal would include the benefit accrual and a non-qualified plan against a deferral cap equal to one times pay--the lower of one times pay or $1 million. 

To assess the impact of this on employees, we measured the size of the age 55 accrual for 1,000 plan participants.  We were startled to learn that in almost every situation, over 90 percent of the time, the age 55 accrual exceeded the one times pay cap. 

As a result, under the Senate's approach, the employee would be taxed on the value of all accruals in all non-qualified plans, and pay a 20 percent penalty, even though he or she is not retiring, or in constructive receipt of the money.

This result would create the unfortunate effect of forcing the company to limit, or eliminate, non-qualified restoration--its non-qualified restoration plan.  Clearly, this would cause a significant loss of retirement security for a sizeable group of middle and senior managers, and prevent them from receiving the same level of benefits that other employees are entitled to.

An additional concern is the broader effect this could have on the retirement security of all employees.  In today's environment, traditional defined benefit plans already face many challenges.  Disenfranchising middle and senior managers from these plans would add another huge challenge to the continuation of these plans.  At a time when we're fighting desperately to maintain the defined benefit pension system, it is hard to imagine that this is what the Senate intended with this provision.

PepsiCo offers the opportunity to elect to defer base salary or bonus as a means of encouraging personal and retirement savings.  Under the Senate bill, investment earnings on non-qualified deferrals would count against the cap, and could trigger non-compliance, either in isolation or in combination with other plans.  The unpredictable and harsh effect of this can be seen from a simple example.

Consider the example of a 45-year-old employee earning about $200,000, who voluntarily defers 30 percent of salary each year.  Assume the account earns seven percent interest, based on market performance.  The account generally increases in value, due to the continued annual deferrals and steady investment returns. 

As the employee's account balance increases, however, it becomes more likely that one year of unexpected high investment returns, combined with accruals from other plans, would throw the employee over the deferral cap.  In our example, 1 year of 12 percent returns for a 61-year-old would throw them over the cap, trigger taxes, and trigger penalties, again, even though they're not in receipt of the money, and they haven't retired.

I have other examples that I would like to share with the Committee, but let me suggest that before we issue any 409A regulations, or expand upon it, we should finalize the current regulations that are issued but don't have final guidance available. 

If further regulations are deemed necessary, I would encourage that we focus on Chief Executive Officers (CEOs) or National Exchange Officers (NEOs), which is where the perceived abuses have been identified, implement a uniform cap of $1 million or more with annual indexation--in other words, eliminate the "lesser of'' test--exclude broad-based restoration plans that don't provide extra benefits, exclude elective deferral programs and the investment earnings on those programs, and, if implemented, make any changes prospective, without the need to modify or review current year deferral elections. 

Thank you, Mr. Chairman.

[The prepared statement of Mr. Heaslip follows:]

Chairman RANGEL.  Thank you. 

The Chair recognizes Kenneth Petrini, vice president of taxes, Air Products and Chemicals, Inc.

STATEMENT OF KENNETH R. PETRINI, VICE PRESIDENT, TAXES, AIR PRODUCTS AND CHEMICALS, INC., ALLENTOWN, PENNSYLVANIA, ON BEHALF OF THE NATIONAL ASSOCIATION OF MANUFACTURERS

Mr. PETRINI.  Mr. Chairman and Members of the Committee, thank you for inviting me to testify on behalf of the National Association of Manufacturers (NAM), on the revenue-raising provisions included in the legislation currently pending in Congress.  My name is Ken Petrini, and I am vice president of taxes at Air Products and Chemicals.  I also serve as the Chair of the tax and budget policy Committee of NAM.

The NAM is the Nation's largest industrial trade association, representing small and large manufacturers in every industrial sector, and in all 50 States.  Many NAM members believe that tax relief is critical to economic growth and job creation.  In contrast, revenue raisers, like those that we will talk about in our testimony, will impose new taxes on those businesses, making it more difficult for them to compete in the global market place.

In particular, H.R. 2, as passed by the Senate, includes several tax increases that are of particular concern to American manufacturers.  A common theme with these proposed changes is that while they may be rooted in some valid policy concerns, they are drafted in such a way to be overly broad, and threaten to ensnare transactions and expenses well beyond their intended scope.

Manufacturers currently face some of the highest legal costs in the world.  Based on a recent study by NAM's Manufacturing Institute, court costs for U.S. businesses are at historical highs, and are higher than similar legal costs in other countries.  Yet, two provisions in the Senate bill would add to the current anti-competitive legal cost burden facing U.S. manufacturers.

The proposals to eliminate tax deductions for punitive damages and settlements of potential violations of law represent significant changes to, and an unnecessary expansion of, current law that will increase the cost of doing business in the United States for manufacturers.

Under current law, taxpayers generally can deduct damages paid or incurred, as a result of carrying out a trade or business, regardless of whether those damages are compensatory or punitive.  The proposed change to make punitive damages--damage payments in civil suits non-deductible, whether made in satisfaction of a judgement or settlement of a claim, runs counter to fundamental and well-established tax principles, and represents unsound public policy.

In particular, the proposal violates the principle that income should be taxed only once.  Since punitive damages would not be excluded from income, both the payor and the recipient would be subject to tax on the punitive damages, thus imposing a double tax on the same income.

The proposal also violates another principle of Federal tax policy, and that is to provide similar tax treatment for similar behavior.  Different standards and guidelines apply in different jurisdictions in this country, and that could result in punitive damages in one jurisdiction that are not punitive damages in another.

For a broader policy perspective, the proposal is based on a false premise that punitive damages are the same as non-deductible criminal or civil fines that are fixed in amount, and are imposed for specific activities that are defined in advance.  In contrast, punitive damages are often awarded under vague and unpredictable standards.

Clearly, too, the issue of settlement agreements with governments, as in the proposal discussed earlier, this provision runs counter to fundamental and well-established tax principles, and represents unsound public policy.  Currently, a business cannot deduct from income any fine or similar penalty paid to a government for violation of any law. 

This proposal would extend this provision to the non-penalty portion of settlement payments, thus eliminating the deduction for most, if not all, settlement agreements with the government on a wide range of issues, regardless of whether there was any wrongdoing.  We are concerned that, regardless of the intended scope of the provision, that it could be greatly expanded in subsequent administration by tax auditors to deny deductions and to prevent resolutions of many issues that can be beneficial to all.

Manufacturers operating in the United States today face a significant regulatory burden.  These regulations are often ambiguous, and subject to interpretation, making it difficult, if not impossible, to ensure 100 percent compliance at all times.  We have a strong policy reason to have a system that allows businesses to voluntarily settle and pay Government claims.

NAM, also in its testimony--and in the interest of time, I will try to summarize very briefly--has expressed concern about the non-qualified deferred compensation provisions, and also section 162(M) of the proposals dealing with executive compensation.  We agree with the comments of the prior witness, and we would only add that, with respect to deferred compensation, that we ask the Committee to consider the policy reasons behind the deferral of compensation, and the reasons why businesses actually allow for deferred compensation, and also to consider that in enacting section 409A in 2004, you enacted provisions that would make it very difficult for senior executives, key employees, to cash out of a business while it was failing. 

Those provisions are, in fact, consistent with the policy behind deferred compensation, which seeks to align the interests of the shareholders with those of the executive, and we should be encouraging the deferral of compensation, in an unfunded fashion, by executives, because it does, in fact, align those interests with those of the shareholders.  Thank you again for this opportunity to testify.

[The prepared statement of Mr. Petrini follows:]

Chairman RANGEL.  Thank you, Mr. Petrini.  As an aside, are you familiar with the International Labor Organziation (ILO) suggestions, provisions in the trade laws, as relates to the NAM?

Mr. PETRINI.  No, Mr. Chairman, I am not.

Chairman RANGEL.  It's not on today's schedule, I just thought--thank you so much for your testimony.

Edward Kleinbard, partner, Cleary Gottlieb Steen & Hamilton, New York, on behalf of the Securities Industry and Financial Markets Association.  Thank you so much for taking time to share your views with us this morning.

STATEMENT OF EDWARD D. KLEINBARD, PARTNER, CLEARY, GOTTLIEB, STEEN & HAMILTON, LLP, NEW YORK, NEW YORK, ON BEHALF OF THE SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION

Mr. KLEINBARD.  Thank you, Chairman Rangel, Ranking Member McCrery, and Members of the Committee.  Thank you all for inviting me to testify today on behalf of the Securities Industry and Financial Markets Association.

I am here to speak in opposition to a Senate proposal that would reverse settled law by increasing the tax burden on contingent payment convertible bonds.  Contingent payment convertible bonds are simply publicly-issued debt instruments with two additional features. 

First, the holder of a contingent payment convertible bond can convert that instrument into the issuer's stock at the holder's option, just as is true of a traditional convertible bond.

Second, issuers of contingent payment convertibles make an economically meaningful promise to pay additional cash bonus interest, if certain future conditions are met.  In this respect, contingent convertibles are similar to other contingent payment bonds, such as one indexed to the price of gold or to the S&P 500.

Contingent payment debt instruments may sound exotic, but they in fact are a common and important financing tool that many American corporations have used over the last few years to raise over $90 billion in capital.  The IRS and Treasury have extensively reviewed the tax analysis of contingent payment convertibles, and these experts confirmed the legal analysis that the Senate bill now proposes to reverse.

The Senate bill would undo settled law by cutting back the interest deduction available to an issuer of contingent payment convertibles.  Instead of deducting its true cost of borrowing, an issuer would be limited to deducting no more interest than it could have deducted if it had issued traditional convertible bonds.

At the same time, investors would be taxed on much higher amounts of income, as if they had purchased a pure contingent payment bond linked, for example, to the price of gold. 

Why is the Senate proposal wrong, as a matter of tax policy?  Why should simply adding a promise to pay bonus interest to a traditional convertible bond change the tax results for bond issuers and investors, alike?  That, in essence, is the Senate Finance Committee's argument. 

Our response is that the Senate Finance Committee's reasoning is problematic for four reasons.  First, it claims to treat contingent payment convertible bonds like other convertibles, when, in fact, it does not do this. 

The proposal creates a worst of all worlds result, in which issuers' deductions are capped at an artificially low number, just like traditional convertible bonds, but a holder's income is not similarly capped.  Instead, holders are required to include, as taxable interest income, their entire economic profit, including the value of any stock they obtain on conversion.

Second, the Senate proposal denies issuers a full deduction for the real economic cost of their borrowings.  The Senate proposal overlooks the economic reality that an issuer's true cost of borrowing includes the value of the conversion option that it conveys to investors, just as the issuance of compensation options has real value to an employee, and a real cost to the issuer.

Third, the Senate proposal will be difficult for the IRS to administer, because it mistakenly assumes that there is a single, typical convertible bond yield for every issuer.

Fourth, the Senate Finance Committee's underlying assumption was that the extra contingent payment features in contingent payment convertible bonds are economically meaningless, and therefore, should not drive the tax results.  This assertion is incorrect.  The IRS today audits exactly this question, and requires an issuer to demonstrate that its promise to pay bonus interest have substantial economic substance.

The Senate Finance Committee acknowledged in its legislative history that there was an irreducible logical inconsistency in the current taxation of convertible instruments.  The Finance Committee argued that the resolution of the question should be deferred until it can "be addressed legislatively through comprehensive reform of the tax treatment of financial products.'' 

We agree with this sentiment, but we respectfully submit that it is the Senate proposal that is introducing piecemeal change, without regard to the larger context.  The tax experts at Treasury and the IRS exhaustively considered how contingent payment convertible bonds should fit into the larger tax system, and came to a carefully reasoned conclusion.  That conclusion should not now be overturned in this ad hoc fashion.  Thank you.

[The prepared statement of Mr. Kleinbard follows:]

Chairman RANGEL.  I want to thank all of you for taking time out.  Could each of you very briefly illustrate an example of the negative impact of the retroactivity of the deferral bill?  We will start with you, Mr. Kleinbard.

Mr. KLEINBARD.  Yes.  Section 162(M)'s retroactive impact means that if a company has a written contract with an employee that is legally enforceable, legally binding against the company, but which requires compensation to be paid this year or next year, the consequence of the Senate bill would be to subject that existing contractually binding agreement to the limitations of revised section 162(M).

So, these are contracts which the company simply can't tear up.  They are enforceable today by the employee against the employer.  Yet, the consequences will be a punitive effect by disallowing the interest expense, a punitive tax to the employer, in the respect of a pre-existing arrangement with respect to existing compensation.

Chairman RANGEL.  Changing the tax law would not be a defense to your contractual obligation?

Mr. KLEINBARD.  No, sir.  No.  The contract does not typically contain a change of law "out" that would permit the company to tear up the contrast.

Chairman RANGEL.  Mr. Petrini.

Mr. PETRINI.  I think, sir, in that regard, it wasn't unusual for companies to try to avoid violating the provisions of 162(M).  Many companies made it a policy and put it in their policy statements that they would not pay compensation that would exceed the 162(M) limits, and as a result, required certain executives to defer compensation that would not otherwise have been deferred, but would have been paid currently, requiring those executives to put that compensation at risk of the company, and the company's continued performance, in unfunded deferred compensation, taking advantage of the fact that under the 162(M) that's currently drafted, that after an executive retired, he was no longer one of those who was subject to 162(M).

To now retroactively change that, means that we have in place many deferral arrangements which were specifically designed, and which were done basically involuntarily, and forced upon executives in order to comply with the 162(M), which, as a result of the change in 162(M) now, would cause those very payments to be non-deductible. 

So, the entire rationale for requiring deferral of certain amounts in excess of $1 million would have been defeated.  It doesn't change what executives can be paid, it doesn't do anything to change their pay policies retroactively.  Frankly, we believe that if executive pay is the issue, then it should be addressed through the work that Chairman Frank's Committee is doing, not through the tax code.

Chairman RANGEL.  Thank you.  Mr. Heaslip.

Mr. HEASLIP.  I generally agree with Mr. Petrini.  Individuals and corporations made deferral decisions based on the rules as they existed at that time.  It's troubling that Congress would consider changing the law and applying it retroactively.  I think it undermines taxpayer confidence in the system, and makes it very, very difficult to set compensation policy within a company.

The original 162(M) legislation had an explicit grandfather of binding contracts and agreements.  We think this approach should be maintained.  There is also an effort to extend the covered employee group and the current Securities and Exchange Commission definition.  While this might not seem to be problematic, I caution that it adds complexity.  To the extent that we can unify the rules, and speak in consistent terms, it makes for a more coherent and identifiable policy.

So, retroactivity is something that we think is problematic, and we applaud your efforts so far to make any changes applied prospectively.

Chairman RANGEL.  Mr. Bentsen.

Mr. BENTSEN.  Enforcing the passive-loss retroactively would trap a number of transactions with an original equipment cost in excess of $800 million.  There are transactions that the IRS has already passed on, and not found--not challenged, and these are transactions that go back to the mid-1990s, multi-year transactions involving the financing of rail equipment, manufacturing equipment, and the like.

In addition, Mr. Chairman, as you know, the existing provision has already had unintended consequences as it relates to the cross-reference rules that were included.  In fact, the final rules have not fully been promulgated because of concerns about the unintended effects of the existing Act. 

Mr. Chairman, you and the prior Chairman, Thomas, and the respective Chairmen Bachus and Grassley had written to the then-Treasury Secretary Snow, in 2005, raising concerns about the cross-reference rules.  We believe the Senate bill would then impose that cross-reference provision retroactively, as well, which would exacerbate the problem.

Chairman RANGEL.  The Chair would like to recognize, for questioning, the ranking Member, Mr. McCrery.

Mr. MCCRERY.  Thank you, Mr. Chairman.  Mr. Bentsen, would this retroactive application of the Senate provision in any way undermine the financial viability of some of those arrangements that were entered into in the mid-1990s?

Mr. BENTSEN.  Our understanding, from--is that under FASB guidance, imposing 470 prospectively would cause members to have to go back and recompute their books from the inception date of the lease.  That would cause them--because it would be a changing in the cash flow stream, that would cause them to have to restate--potentially, to restate their books.  So, in addition to a tax increase retroactively, it also could have financial reporting consequences, as well.

I might add, Mr. McCrery, that my Members tell me that they view this as having--the retroactive nature of this--as having a dramatic impact on the leasing market, from an investor perspective, going forward, as well, well beyond the intent.

Mr. MCCRERY.  Thank you.  Mr. Heaslip, why do companies like PepsiCo have these non-qualified deferred compensation plans, in a nutshell?

Mr. HEASLIP.  Let's take the case of an elective deferral program.  There are three primary reasons.  The first is that they incur savings for retirement, which we think is good public policy. 

Since the plans are unfunded, and the deferrals are at risk, they provide an extra incentive for employees to ensure the continuing health and success of the organization, so that the obligations can be paid out at that point in the future, when they retire.

Then, thirdly, companies can use the deferred monies to invest in their businesses.  Instead of paying them out in current cash, we can take the funds and provide jobs, or buy equipment, or build plants, or use them elsewhere.

Mr. MCCRERY.  Well, you didn't mention, as one of the reasons, that the employee who defers his income avoids taxation.  Does the employee, in fact, avoid taxation on that income, should he receive it in the future?

Mr. HEASLIP.  The employee defers taxation.

Mr. MCCRERY.  That's different from avoiding it.

Mr. HEASLIP.  They don't avoid taxation, they defer taxation, and the matching principle still applies, so that the company does not get a tax deduction for the payment until the employee realizes the payment and pays taxes on it.

Mr. MCCRERY.  Now, you mentioned, in the course of one of those reasons, that the deferred compensation was "unfunded and at risk.''  What does that mean?

Mr. HEASLIP.  What that means is that, unlike a traditional pension plan, for example, assets are not set aside or secured, in order to pay those obligations.  The company pays those obligations out of cash flow at that point in the future, when they become due.

Mr. MCCRERY.  Is that by choice of the corporation, or is that by law?

Mr. HEASLIP.  That is by law.

Mr. MCCRERY.  In fact, the American Jobs Creation Act that we passed recently tightened that criteria, didn't it?

Mr. HEASLIP.  The American Jobs Creation Act imposed a series of additional requirements around the timing of election deferrals, the payout of election deferrals, the form of election deferrals, and it put in special provisions for executives that are considered key employees, in respect to when they can take their deferrals.

We are still digesting those new regulations.  Final guidelines have not yet been issued.  We would propose for final clarification of existing law before we introduce new complexities.

Mr. MCCRERY.  So, since the deferred compensation is taxable when it's finally given to the employee, and since that deferred compensation is unfunded and at risk, as you say, it really does make the employee very interested in the performance of the company, because, as you said, the ultimate payout of that deferred compensation is not dependent upon tapping into some fund that is set aside.  That would be illegal.  It is dependent on cash flow of the corporation. 

Mr. HEASLIP.  Exactly.

Mr. MCCRERY.  It really does tie that employee's interest to the interest of the shareholders, the interests of the corporation, the interests of the officers of the corporation.

Mr. HEASLIP.  That's correct.

Mr. MCCRERY.  Which all goes into, we would hope, better corporate governance.

Mr. HEASLIP.  Better performance for shareholders.

Mr. MCCRERY.  Right.  Now, if the Senate provision were enacted into law, would it impact only the bigwigs in the corporation, the top executives?

Mr. HEASLIP.  In our corporation, approximately 1,000 individuals are limited in the amount that they can receive from the qualified pension plan, and receive a portion of their pension benefits from the non-qualified restoration plan that I mentioned.  So, far beyond the scope of the CEO or the named executive officers.

Mr. MCCRERY.  Thank you.  Thank you, Mr. Chairman.

Chairman RANGEL.  Thank you.  Mr. Levin.

Mr. LEVIN.  Thank you, Mr. Chairman.  Yes, I think you have presented very articulately some problems.  Have any of you testified before the Senate on these issues? 

Mr. HEASLIP.  No.

Mr. LEVIN.  No.  Do you know, have there been hearings on these issues before the Senate?  Maybe you don't know that.  Mr. Bentsen, do you know of any hearings?

Mr. BENTSEN.  Certainly not this year, I don't believe.  There were hearings back in 2003, during the initial--as the Jobs Act, I guess, was initially being created.  I might add, during those hearings when the legislation was introduced, as it relates to our concern, it was stated as prospective.  So the retroactive nature is a relatively new phenomenon.

Mr. LEVIN.  I take it, Mr. Chairman, there is nobody here from Treasury?

Chairman RANGEL.  No, they declined to testify.

Mr. LEVIN.  The punitive damages play a role, and there are differing opinions as to how effective it might be. I think your testimony should be taken not as an attack on the basic structure, but whether we should change the taxation of punitive damages.  Isn't that correct?

Mr. PETRINI.  That is absolutely correct.  The issue really, again, gets to be the matching principle, that if punitive damages are income to the recipient, it makes sense that they be deductible to the payor. 

It is also the issue that the punitive damages is such a vague concept, or it's a concept that isn't consistent from jurisdiction to jurisdiction, and it is very difficult to have a--what effectively would be a punitive tax treatment a payment that is being made that is both taxable to the recipient and is non-deductible to the payer.

Again, the question was asked about retroactivity.  It would have a chilling effect on cases that are currently pending, or that may be an initial decision in, and a decision being made as to whether they will appeal.

So, we are not at all questioning the validity of punitive damages as a substantive matter of law.  We are just saying that the tax treatment shouldn't be singled out from the general principles that we have of an item being taxable to one person and deductible to another.

Mr. LEVIN.  Mr. Heaslip, you said in your testimony that there were about 1,000 employees who could be affected of your company.  Mr. McCrery questioned you, I think, very effectively about that.  Is there any reason to believe that the situation in your company would be unique, or that this issue would apply to a substantial number of employees, other than the CEOs and the higher echelon personnel, in other companies?  Do you have any insight into that?

Mr. HEASLIP.  The limits upon qualified plan benefits apply to all plan sponsors.  So, any company who sponsors a defined benefit plan, like we do, is going to be subject to the same qualified plan limits.

I would further kind of suggest that this is a growing problem, because those qualified plan benefits are not moving at the same rate as pay is.  For example, the qualified plan limit in 1989 was about $200,000.  Today, 16 or 17 years later, it is $225,000.  So, we have a much, much larger group of employees who receive benefits from the restoration plan today than we did 15 years ago, and I would expect that trend to continue.

Mr. PETRINI.  Mr. Levin, if I could, because we can also offer a perspective, being a much smaller employer than Pepsi--we have roughly 10,000 employees in the United States, which I'm sure is dwarfed by PepsiCo--and we would have about 300 employees who would be potentially impacted, because we allow all employees who receive annual cash bonuses to voluntarily defer bonuses, and they have other forms of deferred compensation.

So, if Air Products is an example, on an employee base of 10,000, we have 300 that are affected.  So, it's a very large problem.

Mr. LEVIN.  For those of us who have been very sensitive to the future of defined benefit plans, it strikes me that this testimony should be taken into account.  Thank you very much.

Chairman RANGEL.  Thank you.  Mr. Johnson, from Texas.

Mr. JOHNSON.  Thank you, Mr. Chairman.  I appreciate your testimony.  I tell you, the--I used to be on the education Committee, as you know, and Mr. Heaslip was a witness over there a couple of times.  You have always been clear and very useful in your testimony.

This misguided revenue measure that we have been talking about here that our friends in the Senate have passed, in your testimony you said that the Senate provision would penalize early retirement benefits that simply mirror those in traditional defined benefit pension plans. 

When we revised the pension plans here last year, we tried to do it in a way to keep those plans in force, and it was tough.  As you know, it was marginal whether some companies kept them.  I guess yours did.  What I would like to know is if this retroactivity goes into force, would you all do away with your defined benefit plans?

Mr. HEASLIP.  It certainly would add another challenge to the many that already face defined benefit plan sponsors.  As I said in my testimony, although I have a specific concern about how the individuals in our restoration plan would be affected, I have a broader concern about the implications of this for the plan in general.

I think once we disenfranchise middle and senior managers from a defined benefit plan, it just simply adds another challenge or barrier in an already challenging environment.

Mr. JOHNSON.  Well, it's a difficult position to be in.  You also said it might force managers to leave the company, so they could just pay taxes on their deferred compensation.  You talked about deferral and various forms of compensation all lumped together, a 20 percent penalty because of--the income is above the annual base. 

Isn't it possible that this might undermine long-term corporate planning, and just further induce corporate raiders to buy companies, or figure out how to get around the law, if the law is not fair?

Mr. HEASLIP.  That's true, sur.

Mr. JOHNSON.  Do you want to comment?

Mr. HEASLIP.  It certainly makes individual planning challenging, and could have the effect that you hit on, which is somebody who triggers taxes and penalties if they need to leave the company in order to get the cash to pay those taxes and penalties, and that's certainly not something that we want the tax law to encourage.

Mr. JOHNSON.  Thank you.  Ken, it's good to have another Texan with us today.  Thanks for being here. 

I think you hit it right on the head when you talk about increased taxes retroactively.  They're just not right.  I do not think we can travel back in time to undo transactions that were legal at the time.  The laws of physics and good tax policy prevent, or prohibit, time travel, I would say.

One of the cries we used in 1994, when we won control of this place, was opposition to retroactive taxes.  I don't think we can go back to that.  I would like your comments on it.

Mr. BENTSEN.  Well, Mr. Johnson, I agree with you from the standpoint that I think retroactive tax policy is something that this Committee and the congress, generally, has opposed, because of the impact that it has on both investors and how they will deploy capital for any length of time, and quite frankly, on the ability of Congress to incent investment as they see fit.

So, I think you are accurate.  I would, if I might, very briefly clarify in response to Mr. Levin regarding any hearings, there had not been any hearings on the retroactive nature of this.  The Senate did, subsequent to the introduction of the Jobs Act, take up amendments to this effect to go retroactive.  The House wisely and consistently rejected those amendments, as it has as late as this year.

I just wanted to make sure I clarified that point.  Yes, I think you're right, Mr. Johnson, that this is something that is quite out of character for how the congress has addressed tax policy.

Mr. JOHNSON.  Right on.  Thank you, sir.  Thank you, Mr. Chairman.

Chairman RANGEL.  Thank you, Mr. Johnson. 

Dr. McDermott.

Mr. MCDERMOTT.  Thank you, Mr. Chairman.  This Committee has changed in the years I have been here.  Last week we had a hearing on global warming, and we had a whole panel, and they all agreed, both the Republican witnesses and the Democratic witnesses, that there was global warming.  The question was what you ought to do about it.

Today we have a panel of four people, and I guess they couldn't find anybody to come in and testify that there was some good in what's been proposed by the Senate.  How--explain to me how the Senate could have looked at these provisions and thought, some way, it was good for business.  I assume this is what it is, because if we raise the minimum wage, that's bad for business.  Now we've got to give business something that is good for business to balance that out.

What in the world did they think they were giving to business, or--out of this, that would somehow ameliorate the problem of raising the minimum wage?  Can you help me understand what the thinking might have been over there?  Somebody.  Mr. Petrini, you could start.

Mr. PETRINI.  Thank you.  I don't know whether there was any intent to do something that was good for business.  I think one can look at the four provisions that I talked about, and see how somebody could think that there was a policy behind them.  As we suggested, we think that the policy was misguided, because the provisions themselves are not drafted tightly enough. 

The settlement provision, for example, one can look at that and say, "Yes, it makes sense that a company shouldn't be able to deduct the cost of paying a settlement where they have a violation of law, and they have reached a settlement with a government agency.'' 

However, a lot of what we think would be the restitution part of that settlement, it would be deductible.  The parts that become non-deductible are those parts that we often do that go over and above the perceived violation.  So, we think that the way it was drafted is just too broad.  You look at the deferred compensation.  Everybody agrees--and one can assume that the deferred compensation changes had their genesis in this belief that executives are overpaid. 

As I suggested, I think that if you want to align executives and shareholders alike, you should be encouraging executives to take their compensation in a deferred manner, rather than taking it currently, because that way, they have a lot of skin in the game, as they like to say.

So, I don't think that there was necessarily any intent to help big business, but I think there are some policy reasons behind some of these changes that are proposed.  We just don't think that the policy was well thought-out, or that the proposals get at the harm that was really being addressed.

Mr. KLEINBARD.  Mr. McDermott, I think Mr. Petrini's remarks are absolutely on point.  What I would--to summarize our thoughts on it, is that in several respects--perhaps not in the contingent payment converts, but in some of the other cases--there is a core of an issue that deserves to be thought about and addressed, but that the Senate proposals, as they have been enacted in the Senate bill, are just profoundly undercooked. 

They are not yet fully developed proposals.  They have lots of collateral consequences, which we believe to be completely unintended, or underappreciated.  The ideas need to go back in the oven for a proper set of--for the appropriate time, to develop properly targeted, narrowly-focused issue that does no harm, as well as solving the very narrow problems that were the original target.

Mr. MCDERMOTT.  It's probably a good time, with St. Patrick's Day, to enact Murphy's Law.  That sounds like what you're saying.  Mr. Bentsen?

Mr. BENTSEN.  Dr. McDermott, I think there is a sense that perhaps imposing this provision retroactively, in the most compassionate sense, is trying to go after certain transactions that have been challenged by the Government.

However, in the way that it's done, first of all, serves to undermine confidence in our tax system by doing it retroactively, and I think has far reaching implications beyond just those provisions that may be in question, and certainly captures many more.

Second of all, I think undermines our whole system of due process rights that we have in this country.  Cases that should be challenged will be challenged.  The idea that this is somehow relieving the Government from bringing suit is something generally the congress doesn't do, just as it's something that Congress generally doesn't do retroactive tax policy.

So, ironically, I think it has far-reaching unintended consequences.

Mr. MCDERMOTT.  Thank you.  I still have my question as to what did they think they were doing?  Thank you, Mr. Chairman.

Chairman RANGEL.  We may find out.  Mr. Weller is recognized for 5 minutes.

Mr. WELLER.  Thank you, Mr. Chairman, and I commend you for conducting this hearing today.  As one who supports increasing the minimum wage, I also want to commend you for the bipartisan approach you have taken in putting together a package of tax relief for small business, as part of the package which helps both workers, as well as small business.  The bipartisan approach that you and Mr. McCrery have worked out I commend you on.  It sets a great precedent for this Committee and this congress.  I want to thank you for showing that kind of leadership.

Mr. Chairman, I want to thank you and the panel for this hearing.  Clearly, decisions that investments by business make, many of them are based on tax consequences.  Many of us on this Committee have raised concerns about what we call retroactive tax increases. 

I particularly want to ask about the decision by our friends in the other body to expand transactions subject to the 2004 conversion rules.  I was going to direct this question to Mr. Petrini, if you would.  If others want to respond--but I will direct it to you, Mr. Petrini--is when the Senate voted to expand transactions subject to 2004 inversion rules, would you classify that as a retroactive tax increase?

Mr. PETRINI.  Yes, I think you would have to.

Mr. WELLER.  I guess I have always been told that consistency and confidence in tax policy will remain the same in the foreseeable future is a factor on businesses making decisions on investing and job creation. 

This precedent that would be set when it comes to a retroactive tax increase, what will that do to the confidence level, business decision-makers, when it comes to making business decisions when they consider tax policy with this retroactive tax increase?

Mr. PETRINI.  Well, I think it's very difficult.  Considering my role as a chief tax officer in a company, it's very difficult if you have to give senior management answers to their questions, whether it's inversions, deferred compensation, or anything where you say, "Well, that's the law today, and the law may change.''  They accept the fact that the law may change, and they will take the risk that it will change in the future for things that they do in the future.

If there is an inability to tell people that what you do today will be taxed under the rules that are applied today, and exceptions for binding contracts and commitments made, and you know, often billions of dollars--we're talking about significant capital projects--if you can't give that kind of certainty, it makes it much more difficult to operate in the U.S. tax system.  Perhaps places U.S. companies, or companies wanting to do business in the United States, places the ability to do business at a global competitive disadvantage.

Mr. KLEINBARD.  Mr. Weller, if I could?

Mr. WELLER.  Mr. Kleinbard.

Mr. KLEINBARD.  Thank you.  If I could give a parallel answer, but from the perspective of the capital markets, as opposed to the corporate employer itself, Congressman Bentsen made a very important point, I thought, in his earlier testimony, that the retroactive change in the law, one, changed the perspective of participants in the leasing market. 

The reason for that observation, I believe, is that if participants in the leasing market or in the capital markets, generally, believe that settled law is not, in fact, settled, there is a risk of retroactive change in law, the consequence of that is that they are going to have to charge more money.  They are going to have to charge a risk premium for the risk that the law itself will change, as opposed to just credit risk or market risks.

So, every time you introduce a new kind of risk, the capital markets, which are very efficient, price that risk.  Now, what you're effectively doing, is asking the capital markets to price not simply credit risk and market risks, and those kinds of risks, but also the change of law risk that settled, contractual expectations will not be honored by virtue of change in the tax outcomes, so that the allocation of income from a transaction will not be honored through the retroactive changes in law.  That raises the cost of capital for every company.

Mr. WELLER.  Of course, my classmate and former colleague is with us--good to see you, Ken, thank you for joining us today.  Do you agree, have the same perspective on this retroactive--

Mr. BENTSEN.  Absolutely, Mr. Weller, and I think that the counselor is absolutely correct.  You think of the situations--say, United Airlines, for instance, in your State of Illinois, that investors will underwrite the cost of their airplanes. 

The airline industry, as we know, is already fairly tight on margins in most cases--in many cases, negative margins from time to time.  Their ability to operate is to have aircraft that they can put into the air on a regular basis.  They have to pay a cost for that.  If the cost for capital rises in that, that directly effects their ability to be an operating, or a going concern.

So, yes.  I think this is very serious, far beyond the intended target.

Mr. WELLER.  Thank you.  Thank you, Mr. Chairman, you were generous with my time.  Thank you.

Chairman RANGEL.  The Chair would like to recognize the gentleman from Georgia, Mr. Lewis.

Mr. LEWIS OF GEORGIA.  Thank you very much, Mr. Chairman.  Thank you very much for holding this hearing.  I thank Members of the panel for being here today.  Mr. Bentsen, it is good to see you again. 

Mr. Bentsen, you must have some friends in the Senate that you could talk to and not just come before this Committee?  I'm sure you have some wonderful friends there.

Mr. BENTSEN.  Well, I think I do, Mr. Lewis.  We finally have been talking to the Senate about this, as well.  I think, as--and let me say I appreciate the Chairman for calling this hearing, and having not just us at this panel here, because it does give us an ability to really air these issues out.

I believe that the intentions of the Senate are well intentioned.  I think that they have perhaps not taken the time to look at the implications of what they are trying to do here, as it relates--

Mr. LEWIS OF GEORGIA.  One member of the panel said it's like cooking a meal, and I think you suggested it's not completely baked, and maybe they should put it back in the oven?  Can I hear a reaction to--

Mr. BENTSEN.  Well, in our case, I would say as it relates to retroactively tax policy, I don't know that retroactive tax policy is ever going to be fully baked.  I think that it's something that is just a bad idea, which, if you go back and look--at least from my recollection--at prior tax acts, generally, consistently, the congress has tried to avoid retroactive tax policy where it involves the long-term deployment of capital, because of the impact.

So, I just don't think there is ever a situation where the congress is going to say, "Well, if we do something retroactive, we can raise a lot of revenue doing it,'' that the congress has just generally said, "That's just not a good idea.''  So I don't think there is every going to be a situation where you would come back and say, "Well, we looked at the issue, we studied it more closely, and maybe this works better.''

Perhaps when--certainly on more complex financial issues, like the convertible bond issue, which I am not at all informed to speak on, but there are certainly technical things that I do think take time.  Generally, the congress has always done that.

Mr. LEWIS OF GEORGIA.  That's what he said.  Mr. Heaslip, in your testimony you describe a plan that covers an approximate 1,000 senior managers at PepsiCo.  The program seemed to mimic the company 401(k) plan.  You described the program as a voluntary savings plan. 

How would the section 409A provision affect this plan and its participants?  What impact would it have?

Mr. HEASLIP.  The plan that I am referring to is the elective deferral program, where executives can voluntarily defer a portion of their salary or bonus each year.  It is similar to the 401(k), in that it offers the same investment options, but it's very different from the 401(k), in that the money is at risk.  There is no company match on this plan, as well.

This is the plan where, because earnings are being included in the deferral towards the one times cap, the amount of the deferrals become very unpredictable.  A year of good investment performance could wind up triggering taxes and penalties on money that the executive has not received.

So, in effect, somebody who has saved for their entire career would wind up paying taxes and penalties because they're a disciplined saver, they are putting money away for retirement, and they weren't able to predict the stock market.

Mr. LEWIS OF GEORGIA.  Do you have an estimate for retirement savings for the rank and file employees of a company, compared to the retirement savings for your high-level, well-paid executives?

Mr. HEASLIP.  I do.  Again, we provide a defined benefit plan that provides the primary vehicle for retirement security for all of our employees, and that's completely funded by the company.  So, rank and file doesn't pay anything for that.  Rank and file, about 65 percent participate in our 401(k) plan.  Of our executives, about 30 percent participate in the elective deferral program.

Mr. LEWIS OF GEORGIA.  Would the benefits under the plan be caught on the--

Mr. HEASLIP.  Yes, the elective deferral plan would be.

Mr. LEWIS OF GEORGIA.  So, you are telling Members of the Committee that what the Senate is proposing would have a negative impact?

Mr. HEASLIP.  On savings?

Mr. LEWIS OF GEORGIA.  Yes.

Mr. HEASLIP.  For the individuals in that plan?  Absolutely.

Mr. LEWIS OF GEORGIA.  Thank you very much for being here.

Mr. HEASLIP.  Thank you.

Mr. LEWIS OF GEORGIA.  Thank you, Mr. Chairman.

Chairman RANGEL.  Thank you.  Mr. Brady.

Mr. BRADY.  I am not aware of any taxpayers entering into transactions after Congress enacted the legislation in 2004.  Are you?

Mr. BENTSEN.  No, sir, not to our knowledge.  From what our members tell us, these transactions are effectively stopped with the passage of the Jobs Act.

Mr. BRADY.  Well, it seems to me that with both the provisions, basically the Senate is trying to squeeze more money out of a problem that Congress worked together to solve already. 

While I am not a big proponent of raising the minimum wage--I am a Chamber of Commerce executive by profession, worked a lot with small businesses, I think mandating a $5,000 pay raise will have a real impact on some of our small businesses--nonetheless, Chairman Rangel worked hard with the minority to craft a tax package in the House that actually tried to ease some of the impact of that minimum wage.  I am very grateful for that.

I look at the Senate, and I think they're way off the mark, both in their tax provisions and their revenue raisers.  I look at this provision as one of those issues. 

To talk about the negative--or to reveal the negative impact Mr. Lewis just talked about, the Senate is not just changing rules in the middle of the stream, they are changing the rules five years after you crossed the stream.  I think it has a real impact in the future, and can for you and Mr. Kleinbard.

Looking forward, what signal does this retroactivity send to taxpayers who are thinking about making future capital investments?  Well, what does it say to them?

Mr. BENTSEN.  Well, Mr. Brady, I would say, ironically, if you look at the Senate package, for instance, it contains certain provisions to create investment going forward, over a multi-year basis.  A taxpayer who would be looking--an investor who might be looking at that would also be thinking, "Well, there is another provision within this bill that actually steps--reaches back and imposes a tax on me.''

So, I would think twice about whether or not I would follow the other provisions that are contained in this bill, where I am going to be expensing benefits to make a long-term investment, because who is to say that next year they're not going to come back and reach back and take that back from me?  Whereas, I might go put my capital elsewhere, where I feel more confident.

So, I just think it is quite problematic, the way it's structured, and quite frankly, undermines some of the other provisions that are in that bill.

Mr. BRADY.  Encourage on one hand, and discourage and raise uncertainty on the other hand?

Mr. BENTSEN.  Yes, sir.

Mr. BRADY.  Thank you.

Mr. KLEINBARD.  I would agree with what Congressman Bentsen said, and I would emphasize the theme that economics teaches us that the success of our country's economy has always been based on a notion of a rule of law, and the importance of having clear property rights, having clear enforceability of those property rights, and a clear relationship between--in connection with this Committee--the taxpayers and the Government, makes it possible to predict, with some certainty, what the consequences of your actions will be.

Let me take an over-the-top example, just to illustrate the point.  If we had a world in which every homeowner was at risk, that 1 out of every 1,000 homes would just be randomly seized by virtue of a lottery by the Government, to be used to pay a shortfall in the revenue bill, that would affect housing prices.

Mr. BRADY.  It's called eminent domain.

Mr. KLEINBARD.  Eminent domain doesn't work by lottery, and in eminent domain you could get paid.  In my example, it's just a lottery, the house gets taken away from you.  It would affect your willingness to own a house.

The same is true here.  Any time you have rules where there is a shadow of uncertainty, the capital markets will respond by pricing in that risk.  The consequence of pricing in risk is that the cost of capital goes up.

Mr. BRADY.  Well, thank you.  You finished the point, I think, that Chairman Rangel has made, which is while Congress frequently changes rules in the middle of the stream, this Committee has gone out of its way, historically, to not change those rules retroactively, to try to provide some consistency in tax code, in tax policy, especially in the areas of investment.  Thank you, Chairman Rangel.

Chairman RANGEL.  Thank you, Mr. Brady.  The Chair recognizes Mr. Neal for 5 minutes.

Mr. NEAL.  Thank you very much, Mr. Chairman.  Mr. Heaslip, you have testified about the problems you see in the non-qualified deferred comp proposal.  Many of us have also heard from businesses in our districts that this provision could hit middle or senior managers, not just necessarily CEOs.

Your testimony refers to one example of a manager earning $100,000 annually, who was laid off because of downsizing.  This person's pay could be subject to the higher taxes because of the proposed revision. 

Could you explain how this would work, and might you make some recommendations about how to better target this proposal, including a $1 million uniform cap, and limiting the provision to CEOs and certain other executive officers?

Finally, are these legislative changes--or, could they be done in an administrative manner?

Mr. HEASLIP.  The example that you referred to is the example of where a manager is--loses his or her job because of a restructuring or a plant closing.  In our company, we have a practice where, if an employee is within five years of retirement, and they lose their job because of downsizing, we provide a special early retirement benefit to them from the non-qualified pension plan.

The goal for the non-qualified benefit is to treat them more like an early retiree than a terminated employee, and to avoid the substantial loss in pension benefits that they would otherwise experience because of the plant closing.

We pay this benefit from the non-qualified plan, in order to comply with discrimination rules on the qualified plan.  If this payment from the non-qualified plan were subject to the Senate's proposals, it could easily trigger the one times deferral cap, and invoke taxes and penalties at the same time that somebody is losing their job and entering a more uncertain financial future.

This scenario could be avoided through technical changes to the law, but it would be much simpler, and I think fairer, if it were resolved with something like the $1 million cap that you suggested.

Mr. NEAL.  Okay.  Mr. Petrini.

Mr. PETRINI.  If I may, because we have a slightly different view, and that is that we continue to believe that it's a misguided notion that somehow deferred compensation is CEO-friendly and shareholder unfriendly.  We believe that, one, you should get input from shareholder groups, so they see the alignment from deferred compensation. 

We do believe, and our members believe, that when senior executives defer compensation, and the more they defer, it aligns their interests with the interests of the shareholders, as far as the going concern of the company, because those shareholders and the executives then have the same interests.  The executive essentially becomes an unsecured creditor, really of the lowest rank, as far as security, in the company.  That's not a bad place to have your executives, where they have a great amount invested in that company, and their ability to get that payout depends upon the company's ability to perform.

So, we would suggest that trying to limit CEO deferred compensation may, in itself, be one of those things that is half-baked.  Somebody should really look at whether deferred compensation doesn't align CEO interests and shareholder interests better, and should be something that we should encourage, rather than discourage.

Mr. NEAL.  Thank you.  Thank you, Mr. Chairman.

Chairman RANGEL.  The Chair recognizes Mr. Linder, from Geogia, for 5 minutes.

Mr. LINDER.  Thank you, Mr. Chairman.  Mr. Heaslip, explain again why you have this non-qualified plan.  You said it was to make up a shortfall in other provisions?

Mr. HEASLIP.  Yes.

Mr. LINDER.  Explain that again.

Mr. HEASLIP.  We have a defined benefit plan that we offer to all employees.  The IRS code limits the benefits that can be paid from such a plan.  So, we sponsor a non-qualified restoration plan to essentially mirror, or restore, the benefits that would normally be available from the qualified plan--

Mr. LINDER.  How does that get around the IRS rule?

Mr. HEASLIP.  Since the benefits are not funded, and they do not receive the favorable tax treatment that qualified plan benefits receive.

Mr. LINDER.  Okay.  It's just cash flow.

Mr. HEASLIP.  It's just cash flow, unsecured.

Mr. LINDER.  That is entirely elective?

Mr. HEASLIP.  It is--no.  There are no decisions.

Mr. LINDER.  I see.

Mr. HEASLIP.  The benefits are based on the same formula as we have in the qualified pension plan.  There is no discretion or decisions or a choice between current cash and retirement benefits, on the part of the executive.  It's simply a restoration adjunct to the--

Mr. LINDER.--the electability of it--

Mr. HEASLIP.  That's correct.

Mr. LINDER.  That's correct.  Mr. Kleinbard, explain to me what an exit tax is, for people who have spent a long time living in the United States from Great Britain, and work for a foreign company.  I assume they don't pay taxes on the money they make here.

Mr. KLEINBARD.  An individual who is a citizen of Great Britain, sir, is your example, and who lives in the United States, and is a current resident of the United States?

Mr. LINDER.  Yes.

Mr. KLEINBARD.  Is taxed on his worldwide income by the United States, just as a U.S. citizen is, if they are permanent residents of the United States.

Mr. LINDER.  What is the exit tax?

Mr. KLEINBARD.  The exit tax--and this is an issue, obviously, to which--in the nature of my practice, I always like to do it with the books open in front of me, so I apologize if I don't get it quite right. 

The idea of current law is that if it's a U.S. citizen, for example, who wishes to move to a foreign jurisdiction, we impose a tax on the unrealized gain, in respect of his or her assets and other contractual rights to income that they might have, so there is no advantage, you can't make money by simply tendering in your U.S. passport.

Mr. LINDER.  What if it's a foreign citizen?

Mr. KLEINBARD.  I don't know how the exit tax works for foreign citizens.

Mr. PETRINI.  This was actually part of our written submission.  If the individual is either a citizen or a green card holder, and gives up the citizenship or the green card, the exit tax applies.  It has gone through various iterations.  It seems like there was always some form of a revenue-raiser that is getting at expatriation. 

It is revenue driven.  Its original form was expatriation that was designed to avoid income tax, and it made a lot of sense, because it was getting at an abuse, where people were giving up citizenship, or giving up green cards, to avoid tax.

The situation our members see is that we try to bring foreign nationals in as--just as we send U.S. citizens abroad as expatriates, we bring foreign nationals into this country to work, sometimes for fairly long-term assignments.  Someone, for reasons--often personal reasons--will obtain their green card.  There is a natural flow of things.  When they return to their home country, they will give up that green card.  They are not expatriating to avoid tax, they're basically going home.  It has become a very difficult situation for companies that employ both expatriates and inpatriates. 

I suggest that it may actually be an issue that companies have to take into account considering where they locate their headquarters, because in this global economy, you want a continued flow of people of all nationalities in and out of your headquarters, so that you can really mirror the way your customers look.

Mr. LINDER.  Do other nations, to your knowledge, do other nations have a tax like this?

Mr. PETRINI.  I don't know of another nation that has this kind of a mark to market tax, simply because you have given up--especially as a permanent resident--non-citizen, and I don't know of another country that has it.

Mr. LINDER.  Thank you.  Thank you, Mr. Chairman.

Chairman RANGEL.  Thank you.  The Chair would recognize Mr. Tanner for 5 minutes.

Mr. TANNER.  Thank you very much, Mr. Chairman.  I will try not to utilize all of the time.  Thank all of you for being here. 

I came here this morning, primarily interested in hearing the discussion regarding the compensation and retroactivity issues, and I think you all have adequately covered them, and I thank you.  I also will welcome Ken back.  I am always interested in your observations of where we are here.

Now, one question.  I was reading about part of the bill that has to do with trying to help the IRS discern what's a fine or a penalty, and there may be some problems with that, in terms of some unintended consequences.  Mr. Petrini, could you address that, please?

Mr. PETRINI.  Sure.  The basic provision causes certain payments that were made as a result of a settlement to be non-deductible.  I think the problem we see with it is that it--the way it's drafted, and the reach of the bill may be a bit too broad.

The example that I am going to use is it would deal with any payment that is made in settlement of an inquiry into violation of--possible violation--of law.  So, take the example that we have all seen of a spill of chemicals, or another item somewhere, that has caused a problem in a stream.  You deal with the EPA, and you agree you're going to clean up the stream.

You have also had some bad press, so you decide you're going to build a park--on the bank of a stream, maybe build some areas for fish to spawn in the stream, and actually make the stream better than it was before. 

Well, under this provision, your expenses in cleaning up your spill would probably be deductible, but the expenses that you incur in building that park, and in building that spawning area for fish, and in making the stream better than it was before, those go beyond what's necessary, so therefore, they would be non-deductible.  To me, that's sort of counter to what you would think public policy would be, to try to encourage more of that kind of a civic spirit.

Mr. TANNER.  That would represent a change in present law?

Mr. PETRINI.  Yes.  Under present law, these types of amounts you would spend are deductible, and they are not treated the same as a fine or a penalty would be.

Mr. TANNER.  If a fish issue comes up again in conference, maybe we could get you to help us with some language.  It would actually accomplish a good public policy in this area.

Mr. PETRINI.  We would be very happy to do that.

Mr. TANNER.  Thank you.  I yield back the balance of my time, Mr. Chairman.

Chairman RANGEL.  Thank you.  Mr. Porter is recognized for 5 minutes.

Mr. PORTER.  Thank you, and I appreciate the panel being here this morning.  This may have been addressed, so bear with me.

What I hear regularly from families and businesses is that we are constantly changing the rules.  Small investors and even folks that are of modest incomes have tried to plan their future.  Some of these changes being retroactive and back to 2004, how does that impact the expansion of business, the expansion of an individual that would like to reinvest, create more jobs to help our economy?  This changing the rules, how is that impacting?

Mr. KLEINBARD.  Mr. Porter, I would answer that question by saying that I think that the point that we would like to make, at least, is that a small investor is not directly affected by the change in ILO rules.  So, in that narrow sense, using that as an example, there is no effect.

The same is true for some of the other retroactive provisions of the bill.  The question is if retroactivity is viewed not as extraordinary, but as ordinary practice by the congress, then the risk of retroactivity has to be priced into everything that people do.  That, in turn, has a direct impact on the markets.  It is another risk that needs to be priced, and the consequence of that is that the cost of doing business in the general sense, the cost of raising capital, goes up.

So, it's not the specific provision that necessarily affects the economy as a whole, but it's the question of the erosion of a principle, the principle being that tax laws are a--are something that--to which people can predict with certainty how they will apply.

Mr. PORTER.  From the equipment leasing perspective, what impact does it have on--long-term, for your industry?

Mr. BENTSEN.  Well, I would agree with Mr. Kleinbard.  Investors, the people who are underwriting investments, and whether it's commercial aircraft, or if it's construction equipment, or rigs, or you name it, are going to--they will price that risk in.  They are going to look at actions by the congress, and if they're making a 5, 7, 20, or 30-year investment, and they see the congress coming back and changing the rules retroactively, that will set a precedent that will apply to other types of transactions.

The gentleman is correct, is doesn't--the specific provision itself may only apply to some investors, but the market, as a whole, will look at this, and look at the precedent, and they will ultimately--markets are fairly efficient, and they will ultimately price that in, because the view will be, "Well, if Congress feels that it can be retroactive in this sense, in this instance, why can't they in others?''  That's to say, "Well, we did it before, what's to stop us from doing it again?''

Mr. PORTER.  Thank you.

Chairman RANGEL.  The Chair recognizes Ms. Tubbs Jones for 5 minutes.

Ms. TUBBS JONES.  Mr. Chairman, thank you very much, and thank you for hosting this hearing.  Like my colleagues, I heard from my banking institutions and small businesses with regard to these changes. 

Let me also say hi to my colleague, Mr. Bentsen, it's nice to see you.  Welcome back to the House. 

Let me start, if I can, with the gentleman from PepsiCo, Mr. Heaslip.  In your testimony--and I don't believe you spoke specifically about this, but it is in your written testimony--about the impact of these proposals with regard to deferred comp would have laid-off workers or severed workers--maybe you did talk about this, maybe I missed it--about coming and going.

If you would, just very briefly, reiterate the impact this--these changes would have on laid-off workers, in terms of diverted comp.

Mr. HEASLIP.  Sure.  It's not clear.  We did touch on it earlier, but there is a potential that severance benefits we pay from the non-qualified plan to severed employees could be swept up in this proposal. 

While it's not clear if they are or not, it would seem to be a harsh and unintended consequence if we further penalized someone who had just recently lost their job as a result of reorganization with taxes and penalties on a payment that was supposed to represent some kind of retirement security for them.

Ms. TUBBS JONES.  If you had your opportunity to mark the legislation, what would you propose that we would do?  Leave it as it is, or make some other change?

Mr. HEASLIP.  Without trying to be facetious, I would probably resort first to a shredder.  Then I would--I actually--

Ms. TUBBS JONES.  That specific provision, I apologize.

Mr. HEASLIP.  That specific provision.  I think if you stuck with a $1 million cap, it would eliminate most of the individual issues that I cited in my testimony.

Ms. TUBBS JONES.  Great.

Mr. HEASLIP.  Help to narrow this more--focuses more narrowly on very senior executives, which I believe was its intent.

Ms. TUBBS JONES.  Mr. Bentsen, again, I have been coming and going, so I apologize.  This seems to be the day that every constituent in my congressional district wanted to see me at this hour.

Stick for a moment about the ILOs.  Even though they are no longer taking place, there are existing ones that still have time to run their course.  What would you propose that we would do with regard to them?

Mr. BENTSEN.  Good question, Congresswoman.  There are such transactions in place.  Those that are--and there are some that have been questioned by the IRS.  The bottom line is that, as Congress intended by establishing the tax courts and the whole process of it, the transactions that the Service feels are questionable or should be challenged, are in fact, being challenged.

So, the process itself is working.  If, in fact, the service prevails in that challenge to record or direct negotiations, then the Government and the taxpayers, as a whole, will get their due.

What this provision would do--would do, really, two things.  One, it would impose this retroactive tax on every type of transaction, whether they were challenged or not.  So, it's a very blunt instrument, in that regard.

Second, it really would tilt--it would undermine the due process rights of taxpayers that is a basic standard and right in this country, and would tilt the balance in the favor of the Government. 

The proponents have made the argument--perhaps well-intentioned, but I think faulty--in saying, "Well, this would relieve the Service of having to bring suit.  In fact, we believe the Service is going to win all these cases.''  Well, they haven't won any cases yet.  There have been no judgements rendered.

Again, I don't think it's appropriate to intervene at this point on the assumption that something is going to happen that has not yet happened, and to deny a taxpayer their day in court.  If, in fact, the Government proves their case, then, as I said, the Government will get its due.

Ms. TUBBS JONES.  I thank you for your answer.  To the other gentleman, I have run out of time.  I had questions for you, but the Chairman is running a close clock.  Thank you, Mr. Chairman.

Chairman RANGEL.  Mr. Pascrell.

Mr. PASCRELL.  Thank you, Mr. Chairman.  Sorry I had to duck out for another meeting.  I know some of these things have been touched, but I would like to ask the panel your reaction to what I have to say.

I have deep reservations about the Senate's version of deferred compensation, I really do.  It hurts too many people, and we should be targeting those that are greedy, instead of looking at the entire--I respect the attempt made by the Senate to limit the levels of compensation of senior officials who can electively defer, in an effort to avoid paying taxes.  What that number is, is quite interesting.

I have a couple of concerns.  First, the Senate provision is retroactive.  I believe wholeheartedly that it is the duty of Congress to remedy laws that are potentially being abused.  I believe it is often inherently unfair to go back in time and penalize individuals for actions taken at a time when the law was permissive of a particular activity.

I think this Committee needs to ensure that any restrictions that may be adopted will be completely prospective.  I think that it should be a general rule that any action we take, regardless of what specific section we're talking about, will in no way, shape, or form, apply to any prior actions, including prior deferrals.  That's my opinion.  Or, decisions taken prior to the date of the enactment.  I hope you agree with that.

I am also concerned about the overly broad applications the Senate provision would entail.  There are many legitimate uses for deferred compensations, including employee retention, the alignment of shareholder/employee/employer interests.  I would hate to see these programs lose their effectiveness because the congress was not precise, as well as incisiveness in shaping and drafting the legislation.

I would like to work to ensure that if some form of the Senate's provision is included in the final small business tax package, that it be carefully crafted to affect only its intended targets.  I would like your quick responses to that, please.

Mr. PETRINI.  Mr. Pascrell, I have to respectfully disagree with one premise that you started with--actually, two parts of it. 

One is the provision should only affect the greedy, because I don't think that deferred compensation has anything to do with greed, but let me explain.  When we're talking deferred compensation here, the issue of how much an executive should be paid, I don't think that is an issue where the issue of greed comes in.

Let's assume that it's been decided that the executive is going to be paid $10 million a year, and we can agree whether or not that is greedy.  If that executive is going to be paid $10 million a year in cash, versus being paid $1 million in cash and $9 million deferred, there is no greed involved in deferring that $9 million. 

In fact, I think the shareholders are much better served by the fact that instead of this person taking $10 million of cash out of the company today, he has actually left $9 million at risk. The other part of that--

Mr. PASCRELL.  Just to respond to that--

Mr. PETRINI.  Sure.

Mr. PASCRELL.  I am talking about those folks who are at the top of the ladder.  I am not talking about middle management.  Those people have been caught up--or would be caught up--if that legislation passed.

Mr. PETRINI.  No, I'm talking about an executive who would make $10 million, otherwise.

Mr. PASCRELL.  All right.

Mr. PETRINI.  I think we should encourage him to defer as much of that $10 million as possible.  I think it's a totally different issue, how much he should be paid, but whatever he is being paid, we should ask him to defer as much as possible.

Mr. PASCRELL.  I agree, I agree, I agree.

Mr. PETRINI.  The other issue is there is no tax avoidance involved in deferred compensation, because non-qualified deferred compensation perfectly follows the matching principle.  The executive is not taxed until he receives the money, the company does not get the corporate tax deduction until it is paid.  It is perfect matching, there is no tax avoidance involved.  There is tax deferral.

In fact, the way the system works, the company has to give up its deduction.  It's the same as if the company had borrowed money from the executive.  So, there is really no tax avoidance here. 

That's the issue I have tried to make a few times today, is that executive deferred compensation, whatever you believe executives should be paid, having them defer compensation is good.  It's good for aligning their interests with those of the shareholders, because if they run that company into the ground, they get none of that.  It's consistent with what you enacted in section 409A, which basically requires key employees to leave their money at risk of the company, and avoids cut and run type of things on the pass.

So, I would actually urge a lot more thought on whether deferred compensation is bad, even for those who make a real lot of money.

Mr. PASCRELL.  I did not say, nor did I imply, that deferred compensation, in and of itself, is inherently bad.  That I did not say, did not infer.  So, I listen to what you're telling me, but I didn't say that.

I am concerned about fairness, and I am concerned about what goes into the tax revenue, what goes into revenue, what does not go into revenue.  If you defer the tax, you are not--at the time, we may need that in the revenue cycle.

Mr. PETRINI.  Remember, if the executive defers his tax, the company is also deferring its deduction.  So, other than the difference between the executive's rate and the corporate rate, which currently is not all that great, there is no real loss of revenue, just because the income has been deferred, since a deduction is also being deferred.

Mr. PASCRELL.  Thank you.

Chairman RANGEL.  The gentleman from California is recognized for questions, Mr. Becerra.

Mr. BECERRA.  Thank you, Mr. Chairman, and thank you to the four of you for your testimony.  Mr. Heaslip, let me ask you a couple of questions.  Deferred compensation has become an issue over the last few years, especially with regard to CEOs.  You make some good points.  I think you are trying to say, "Be careful how you move on this, because it could have an impact far beyond just a CEO.''

You also--very quickly, because you were running out of time--had some potential recommendations, if we were to try to consider acting on this.  I'm wondering if you can give me a sense of, not just with regard to the specific proposals that were included in the Senate, but just generally, some guideposts that you might want to offer us as we continue to examine deferred compensation, because I think you made a very good point about how the consequences of what we could do--and if I could quote you directly, I think you mentioned that the potential impact could affect things like retirement security, personal savings, competitiveness, and shareholder interest.  I think you're right about that.

So, give me a more broad answer to the general question of this issue of deferred compensation, obviously with a focus on what the Senate did, but just, generally, some guideposts.

Mr. HEASLIP.  Sure.  We agree that executive compensation is kind of one of the most important aspects of good corporate governance.  I think to the conversation that just took place, I would like to make a distinction between how much we pay executives and how we pay executives.

I think the broader issue is how much we pay executives that is being addressed or swept up into this discussion about deferred compensation, which is more about how we pay them and when we pay them.

In my opinion, if you want to get at the issue of executive compensation, we should be looking at governance, shareholder advocacy, disclosure, and transparency in our compensation practices.  We shouldn't be focusing on tax legislation.

If, however, for political or substantive reasons, it is felt necessary to take a look at the rules surrounding deferred compensation, and further regulations are necessary, we think we do need to narrow the focus to CEOs or named executive officers.  We think a uniform cap would be more appropriate than the very broad-based one-time earnings test that is currently proposed.

We would exclude broad-based restoration plans that simply provide the benefits that other employees are entitled to.  We would exclude elective deferral programs for the kinds of reasons that Mr. Petrini has outlined, in connection with the revenue neutrality.  Kind of the additional incentive to perform, in the interest of shareholders.

Mr. BECERRA.  I appreciate that.  I wanted to say welcome to former Member and colleague, Mr. Bentsen, for being here.  We thank you for your testimony.  Hopefully, this will help us shape something that may come out of conference that does address the various concerns that you have all raised.  So, thank you very much.

Mr. LEWIS OF GEORGIA.  [presiding]  Well, thank you very much.  The gentleman from North Dakota, Mr. Pomeroy, is recognized for questioning.

Mr. POMEROY.  Thank the Chair.  I will start with acknowledging my friend and former colleague, Mr. Bentsen.  We still miss you.  Bentsen is known as having made a significant contribution in the Senate.  Maybe less known, but still known to many of us who worked with you.  You served with great distinction in the House, too.  That's a good name, that Bentsen.

Mr. Heaslip, I want to talk to you about pensions, generally.  I appreciated your testimony, in terms of the deferred compensation issue, but in a broader context of employee benefits. 

You indicate that the PepsiCo pension is well funded.  How, in fact, has it been doing in recent years, in light of an improving stock market, relatively strong interest rate environment, what is the funding level?

Mr. HEASLIP.  Yes, it's been a rough ride over the past five years.  As you know, we had poor equity returns in the early 2000s, interest rates have been low, which have increased liabilities, and we are fortunate to have a growing, thriving company that has allowed us to fund the plan over this period of time.  Not all companies have been able to do that.

Over the past five years, we have contributed about $2.4 billion to our pension plan in order to retain its health and funded status.  As a result, we are currently at about 105 percent of liabilities, which obviously provides security to our existing--

Mr. POMEROY.  I think that that's excellent.  I think that there was a misperception, promoted by the Department of Labor, that this rough ride you speak of was a bumpy road toward a system-wide failure, in terms of private sector pensions. 

Recently, the Wall Street Journal reported that the Fortune 100 are, on average, 102 percent funded, and that the recovery of the stock market--because that's bouncing around a little these days--but fundamentally looks strong, and the sustained interest rate environment have substantially improved the long-term outlook for pension plan funding, even before the Pension Act passed by Congress last year takes effect.  Is that your read?

Mr. HEASLIP.  All of those are beneficial to defined benefit plans.

Mr. POMEROY.  I am very concerned that the increase funding requirements passed in the bill are going to lead toward a slew of actions freezing pension programs. 

Do you have an evaluation of that, and what are PepsiCo's plans?

Mr. HEASLIP.  We are going to continue to monitor our industry and the marketplace.  We did a very thorough pension review last year.  We concluded that the plan is appropriate for our workforce.  We are trying to encourage people to spend a career with PepsiCo, have valuable industry and customer knowledge that we want to retain in our workforce.

We are not interested in them working for us for 5 years or 10 years, and then going to a competitor.  A plan is a very effective means of encouraging people to spend their career at PepsiCo.  At the same time, we have to be competitive in the marketplace, and we have to make sure we monitor what our industry is doing, and what our peer companies are doing.  We have to maintain flexibility to make changes, if necessary, to stay competitive.

I don't know that there is any one thing that are going to drive these plans out of business. When I look at the amalgamation of financial challenges, the types of challenges that are presented by this legislation in combination, it does generate concerns about the future health of the system.

Mr. POMEROY.  I will get to this legislation.  Just one moment, one final question, first, and that would be the importance of lifelong income, as provided by a pension.  It's 70 to 80 percent, I believe you indicated, income replacement, and guaranteed, then, over the lifetime the retired employee will have in retirement, that, to me, is a very optimal benefit for someone in the workforce, worrying about what they're going to do in retirement years.

The--given your expertise, do you see anything--have you been able to--have you perceived, either from Congress or the Department of Labor, or anywhere else in the Administration, support for your efforts to continue pensions?

Mr. HEASLIP.  I think, from a policy standpoint, it's very clear that Congress would like to see continuation of the defined benefit system, but from time to time, we get conflicting signals.

Mr. POMEROY.  My own thought is that we are still--we are protecting people right out of their pensions by putting onerous funding requirements that are not necessarily reflective of today's long-term solvency picture, and that we're going to pressure companies.

One final issue--and this is the last question I would have for you--if you take the deferred comp provision of the Senate, and so that you would look at a provision where your upper management, those making the decisions on whether to retain the pension or not, would get a similar income replacement than the rest of the workforce.

Wouldn't it further disincent PepsiCo and other companies to continue pensions for employees?

Mr. HEASLIP.  I think that is one highly likely outcome from this legislation.  If you disenfranchise middle and senior managers, I believe it could throw these types of plans at risk for all employees.

Mr. POMEROY.  My own thought, Mr. Chairman, is that we need to send a very clear and unequivocal signal that pensions for the 20 million workers who have them are vitally important, and we want to help companies keep them in place.----I thank the gentleman for his testimony.  Thank you, Mr. Chairman.

Mr. LEWIS OF GEORGIA.  Thank you, the gentleman from North Dakota, for his comments.  The Chair will recognize the gentleman from New York, Mr. Crowley, for questioning.

Mr. CROWLEY.  Thank you, Mr. Chairman.  Thank you to the gentlemen, for their testimony today.  I know time is of the essence, we have a number of votes before us, so I will just state that I don't have a question for the panel, but I do want to make a statement into the record, and direct that statement to you, Mr. Chairman.

I have deep reservations about the Senate deferred compensation provision.  While I respect the attempt made by the Senate to limit the levels of compensation, and a senior official can electively defer in an intent or an effort to avoid the payment of taxes, I have several fundamental concerns, some of which have already been expressed already.

Second, the provision is retroactive.  While I believe it is the duty of Congress to remedy laws that are potentially being abused, I believe it is inherently unfair to go back in time and penalize individuals for actions taken at a time when the law was permissive of a particular activity.

Mr. Chairman, I am also concerned about the overly broad application the Senate provision would entail.  There are many legitimate uses for deferred compensation programs, including employee retention, and the alignment of shareholder and employee/employer interests.  I would hate to see these programs lose their effectiveness because the congress was not precise in its drafting of its legislation.

Mr. Chairman, I would like to work with you to ensure that if some form of the Senate provision is included in the final small business tax package, that it be carefully drafted to affect only its intended targets. 

Mr. Chairman, I would like to work with you to ensure that taxpayers are not subject to the retroactive provisions of the bill in section 162(M), executive compensation that exceeds $1 million, or annual non-qualified compensation.  Now, Mr. Chairman, I hope to work and cooperate with you in those efforts, and I hope to have your acknowledgment of that.

Mr. LEWIS OF GEORGIA.  Let me thank the gentleman for the comments, and thank each member of the panel for participating and for being here today.  I think your testimony has been quite helpful, more than helpful.

Mr. CROWLEY.  Thank you, Mr. Chairman.  I would like to give a special hello to a former colleague, as well as one of New York State's greatest companies, PepsiCo, for testifying today.

Mr. LEWIS OF GEORGIA.  I believe the record will stay open for 14 days, for any Members who may have comments to issue.  Thank you for being here.

Chairman RANGEL. [presiding]  Let me join in thanking this panel for your knowledge and your patience.  Thank you very much.

[Whereupon, at 12:05 p.m., the hearing was adjourned.]
[Submissions for the Record follow:]

American Bankers Association, statement

American Bar Association Section of Taxation, statement

American Benefits Council, statement

Association for Advanced Life Underwriting, statement

ERISA Industry Committee, statement

Financial Services Roundtable, letter

Hogan & Hartson LLP, statement

HR Policy Association, statement

Richard D. Ehrhart, statement

Statement of Air Products and Chemicals, Inc., Allentown, PA, statement

U.S. Chamber of Commerce, statement

Working Group for Certainty in Settlements, statement