Good story, thanx. Read the following, and wonder what kind of a knot-head would let this happen, and should we feel sorry for him/them??
08/08 13:27
Riches to Rags: Workers Ambushed by Tax on
Options (Update1)
By Ryan J. Donmoyer
Washington, Aug. 8 (Bloomberg) -- Internet and technology workers who thought
they'd become millionaires from options in their start-up companies now want
Congress to free them from more than $1 billion in taxes on stock that's plunged
in value.
At issue is the alternative minimum tax, which these workers must pay even
though they never sold their stock because of legal restrictions or incentives to
hold it for a year. Now stock prices are so low many can't pay their tax bills even
if they liquidate.
``I'm looking at not only financial ruin -- the IRS could mortgage my entire future
as well,'' said Jeff Chou, a 33-year-old hardware engineer who owes the
government $1.9 million.
It's an epilogue to an Internet economy that lavished perks on its workers and
often made them wealthy overnight with initial public offerings.
Many of those same workers and the firms that swallowed their start-ups -- Intel
Corp., Microsoft Corp., Oracle Corp. and others -- are now trying to win
sympathy from a public that itself lost wealth in the stock markets and can
expect no help from Congress.
Between Oct. 8, 1998 and March 10, 2000, the Nasdaq composite index rose
272 percent. Since then, it's fallen 60 percent.
The average investor owes no taxes on the decline in his portfolio and in fact can
use those losses for tax advantages. People like Chou must pay taxes on
options exercised but never sold.
``People are having to pay tax bills on phantom gains they will never, ever see,''
said Caroline Graves Hurley, tax counsel and director of tax policy for AeA, an
association of electronics manufacturers.
Tax Trap
Incentive stock options once were given only to top company officials. The
Internet economy thrived on start-ups that offered rank-and-file workers these
options instead of higher salaries.
Chou learned the hard way that incentive stock options shouldn't be confused
with ordinary employee stock options, which are usually exercised and sold on
the same day and are taxed as ordinary income at rates of up to 39.6 percent no
matter when they are sold. Companies get a tax deduction and must track when
their employees exercise these options.
Chou's Story
Chou worked for a start-up company that offered him incentive options to buy
more than 100,000 shares at ((((((((five cents a share)))))))). The company was bought by
Cisco Systems Inc. When Chou's options -- now for Cisco shares -- came due in
March 2000, they were worth about $60.
Chou exercised. He then held his Cisco stock, intending to take advantage of a
law that offers to tax his stock at a 20 percent capital gains rate if he holds it for
a year. Cisco shares plummeted and when the year was up, they were trading
below $17.
Although he still showed a paper profit, Chou learned he owed the alternative
minimum tax, a 26 to 28 percent rate applied to the spread between his option
price of five cents and the exercise price of $60. Suddenly, the $17 stock price
wasn't even enough to cover his tax bill, which was due April 16. Don't cry for me Argentina!
``I knew I was in big trouble,'' said Chou. It was too late. He was insolvent.
Those who want to change this law readily admit they face an uphill battle in
garnering sympathy after years of stories about Silicon Valley's excesses.
``This is insolvency facing some people who thought they were going to all buy
$10 million houses and now they're faced with an entirely different reality,'' said
former IRS Commissioner Donald C. Alexander, an attorney with Akin, Gump,
Strauss, Hauer & Feld.
Legislation Proposed
Members of Congress who represent districts with computer, electronic and
software workers are pushing the cause. California Representative Zoe Lofgren, a
Silicon Valley Democrat, has proposed a bill that would retroactively nullify the
minimum tax's effect, which would cost the Treasury more than $3 billion a year.
Massachusetts Democrat Richard Neal, long an advocate of abolishing the
minimum tax, offered a more modest proposal -- a one-time fix allowing those
who exercised options to set the market value on April 15, 2001 if it is lower than
the time at which they exercised. Neil's bill would cost the government $1.3
billion. It has the backing of Republicans Jerry Weller of Illinois and Tom Davis of
Virginia and Democrats Lloyd Doggett of Texas and Joe Lieberman, the
Connecticut senator.
Pushing the Cause
The push for change is also underway at the grassroots level. Chou and others
like him started an organization called ReformAMT.org, which now counts about
800 members.
Their web site makes clear they've got a challenge. Its discussion board is
riddled with accusations that those facing monster tax bills simply gambled and
lost and the government shouldn't subsidize greed. Some correspondents note
there'd be no complaints had stock prices continued to rise; others say
ignorance of the tax law is no excuse.
Chou freely admits he made bad investment decisions, but says he and others
are handicapped by a contradictory tax law that punishes employees for trying to
take advantage of a government policy that encourages them to invest in their
employers.
``Whenever you associate the words `millions of dollars' and the word `options'
with people complaining about taxes, it triggers an emotional response,'' Chou
said. ``People need to distinguish the difference between bad investment
planning and a bad tax law. Our only crime was bad tax planning.''
quote.bloomberg.com |
