Daily Tax Update - June 5, 2007

SENATE SUBCOMMITTEE ON INVESTIGATIONS HOLDS HEARING ON EXECUTIVE STOCK OPTIONS:  Today, the Senate’s Permanent Subcommittee on Investigations held a hearing entitled, “Executive Stock Options: Should the IRS and Stockholders Be Given Different Information?” The hearing examined corporate accounting and tax rules that require corporations to report one set of stock option compensation figures to investors on their financial statements and completely different figures to the IRS on their tax returns.

  • Subcommittee Chairman Carl Levin (D-MI) said, “Stock options are a major factor in the growing gap – now chasm – between executive pay and average worker pay.  Companies pay their executives with stock options in part because, right now, those stock options often generate huge tax deductions that are 2, 3, even 10 times larger than the stock option expense shown on the company books.  For example, nine companies we examined claimed stock option tax deductions over five years that exceeded their stock option expenses by more than $1 billion, or 575%, even after using tougher new accounting rules to calculate the book expense.  New IRS data, examining tax returns for periods ending between December 2004 to June 2005, has identified a massive stock option book-tax gap of $43 billion, which means U.S. companies legally reduced their taxes by billions of dollars for that period by claiming $43 billion more in stock option tax deductions than the stock option compensation amount shown on their books.  Those companies did not break the law; they are benefiting from an outdated and overly generous stock option tax rule that produces tax deductions that often far exceed the companies’ reported expenses.”  Levin said that he plans to introduce legislation later this year to narrow the gap between expenses reported on corporate financial statements related to stock options and deductions taken on tax returns related to those same options.
  • Acting IRS Commissioner Kevin Brown said current rules on stock options are "straightforward and easy to administer. . .We like the symmetry and precision of the current system." 

Testimony can be accessed via: http://www.senate.gov/~govt-aff/index.cfm?Fuseaction=Hearings.Detail&HearingID=452

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