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Legislation To Be Unveiled Closing Tax Loophole for Stock Options
> Sens. Carl Levin (D-Mich.) and John McCain (R-Ariz.) soon will
introduce
> legislation that would require companies to report employee stock
options
> similarly on both tax returns and financial statements, a Levin
> spokeswoman said Feb. 7. In the wake of major controversy over the
Enron
> bankruptcy, the legislation is an attempt to fix what Levin's office
> called "a long-festering problem in how some U.S. corporations use
stock
> options to avoid paying U.S. taxes while overestimating earnings."
The
> legislation would shut down a loophole that allows companies to take
tax
> deductions for the stock options they give their employees without
> claiming the options as an expense on their financial statements.
Levin
> spokeswoman Tara Andringa said Levin and McCain plan to unveil the
measure
> sometime the week of Feb. 11.
> According to a summary of the bill from Levin's office, Enron
allegedly
> used this loophole to claim stock option deductions totaling almost
$600
> million, while not reporting this amount as an expense. "The company
can
> tell Uncle Sam one thing and its shareholders the opposite," the
summary
> said. "That's what Enron did."
> Similar Treatment Key.
> The Levin document stressed the bill would not legislate accounting
> standards for stock options or directly require companies to expense
stock
> option pay. The analysis said, however, that companies would have
to
> treat stock options on tax returns "the exact same way they treat
them on
> their financial statements." Under the measure set to be introduced,
a
> company's stock option deduction would be limited to the amount of
> compensation expense that the company actually shows on its books.
"The
> bill would require companies to tell Uncle Sam and their stockholders
the
> same thing," the Levin document said. "Enron has already shown how
much
> damage, if not corrected, the existing stock option double standard
can
> inflict on company bookkeeping, investor confidence, and tax
fairness."
> Industry Opposition.
> Industries that rely heavily on stock options as compensation and
employee
> incentives, such as software and technology firms, are likely to
> vigorously oppose the legislation. Mark Nebergall, director of the
> Software Finance & Tax Executives Council (SoFTEC), said there is no
> reason to tie the tax treatment of the options to their accounting
> treatment. "There is no good way to value them at the time of
issue," he
> said. "There's no cash leaving the company at that point. How do you
> expense that?" Nebergall said the Levin/McCain bill would allow a
company
> to take tax deductions only for the amount it expensed in the year
of
> issue. If the exercise of the option was greater than the amount
> originally expensed, no further deduction would be available. This
would
> make the offering of stock options-vital currency in the software
> industry-more expensive, Nebergall said. "This Enron fiasco is being
used
> as an opportunity to correct a host of ills that have nothing to do
with
> Enron," he added.
>
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