Tech Workers' Stock Options Turn Into Tax Nightmares
Finances: With IRS bills greater than plummeting stocks' values, employees seek legislative relief.
By LIZ PULLIAM WESTON, P.J. HUFFSTUTTER, JON HEALEY, Times Staff Writers
Thousands of technology workers are facing huge tax bills by Monday's income tax filing deadline because of company stock they purchased last year that has since plummeted in value.
Accountants and politicians from Silicon Valley to Boston say they have been inundated with horror stories about shares purchased with employee options that workers once had hoped would make them rich. Instead, the shares saddled them with big tax bills on profit they never saw.
Many of these workers now owe far more in taxes than their stock is worth. Former Cisco engineer Jeffrey Chou, 32, owes $2.5 million in taxes on company stock he purchased last year that has since withered in value. Chou figures that if he were to sell everything he owns, including the three-bedroom townhouse that he shares with his wife and 8-month-old daughter, the family still could not pay the bill.
"I've lost sleep. I can't eat. I cannot pay and we're ruined," Chou said.
The one thing sustaining Chou is a small but growing movement among the financially devastated workers to try to change the rules that snared them. But the issue is an uphill battle legislatively because of a widespread perception that the victims were done in by their own greed or bad planning: In essence, they played the option lottery and lost.
"This is not the most politically compelling story," one congressional staffer said.
Many of the affected workers, however, said they believed they were doing the right thing by exercising options and then hanging on to the stock instead of selling it for quick profit. Some did not understand the tax implications of their stock purchases, and many said they wanted to show loyalty to their companies.
"There was this feeling of 'hold on to it for the long term,' " said Marilynn Goldberg, an unemployed executive recruiter who faces a $500,000 tax bill from Portal Software Inc. stock she purchased using options last year; the stock has fallen more than 80% since then. "You have to remember, it's a new phenomenon. A lot of the people [using options] had never had them before."
What also rankles is the idea that top management may have escaped this pain. Accountants say that some companies have allowed their executives--although not typically their rank-and-file workers--to cancel stock purchases made last year if the shares subsequently declined. The Securities and Exchange Commission has said the practice is legal but told companies they must record an expense that will lower their reported profit. In addition, the companies must disclose the cancellations in future annual reports. So far no companies have made such cancellations public.
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