I believe in equal justice under the law. I see no reason why stock options should not be taxed in the same manner as other income including being subject to the social security payroll tax.
IRS options rule in spotlight
Businesses fight withholding for options, stock grants
By William L. Watts, CBS.MarketWatch.com
Last Update: 12:16 PM ET May 14, 2002
WASHINGTON (CBS.MW) - Corporate tax officials and their allies pleaded with the Treasury Department Tuesday to drop a proposal that would require employers to withhold and pay payroll taxes on some stock option grants and employee stock purchase plans.
At issue is a proposed rule change unveiled by the Internal Revenue Service last November that would require employers, beginning next year, to withhold payroll taxes for Medicare and Social Security on options, reversing the interpretation that has been in place since 1971.
At a hearing at IRS headquarters, high-tech and other business executives and private tax lawyers told a six-person panel of government tax officials that the proposed rule change flew in the face of congressional intent, would put an undue administrative burden on workers and their employers and would ultimately create a legal and procedural headaches for businesses and tax collectors.
Greg Sikon, tax executive at Ciena (CIEN: news, chart, profile), said the move would have made it impossible for the company to provide the stock incentives that have motivated and enriched employees of the telecom equipment maker.
Sikon said the company implemented an employee stock purchase plan in 1998, after the firm saw its once high-flying shares tumble. The message to employees was that if they "stayed focused and pulled through," they would be rewarded, Sikon said.
Since then, employees have seen a return on investment of 850 percent, he said, with an average gain of more than $70,000. Almost all of the company's employees view the program as a "critical part" of their pay package, said Sikon, who was testifying on behalf of the AeA, a trade group representing U.S. electronics firms.
If the proposed IRS rules had been in place, employees would have likely felt the need to turn around and quickly sell stock grants in order to pay withholding, defeating the purpose of the incentive program, he said.
If enacted, the proposed rule would tax the difference between the market price and the purchase price of stocks acquired through employee stock purchase plans and incentive stock option plans.
Opponents of the rule change contend it would put a disproportionate burden on rank-and-file workers while having little impact on higher-paid employees and executives. Earnings above $84,900 in a calendar year aren't subject to the Social Security payroll tax.
Edward Rosic, assistant general counsel for lodging giant Marriott International (MAR: news, chart, profile), told the panel that the measure appeared to contradict the intent of Congress.
He also argued that the plans targeted by the rule change don't meet the legal definition of "income," which means they should be off limits to payroll taxes under current law.
"Neither the grant nor the exercise of a statutory stock option results in income to the employee," Rosic said. "Wages are a subset of income; without income there cannot be wages for employment tax purposes."
The AeA and other business groups are lobbying regulators and Congress in an effort to head off the rule change. They contend that the rule change would result in an additional tax burden of around $23 billion over 10 years. Withholding taxes are split equally between employees and their employer.
Legislation drafted by Rep. Amo Houghton, R-N.Y., that would shield stock option and stock purchase plans from withholding was included in a pension reform bill passed by the House. The Senate Finance Committee is expected to take up similar legislation in coming weeks.
William L. Watts is a reporter for CBS.MarketWatch.com. |
