Hi Clark:
If the company sold the same shares to the public and then used the money to pay workers, it would be an expense under anyone's definition. But if the company takes those same shares and has the employees purchase those shares below market value and then lets the employees resale the shares at market to book the profit, you think it isn't an expense? Can you explain to me the difference in economic terms between the two scenarios? You can't, because there is no difference.
Denying something is income or expense simply because cash doesn't change hands on one side or both doesn't wash. If your company gives you a new Mercedes Benz tomorrow, try telling the IRS it isn't income. Funny that Steve Jobs had to report that 90 million dollar jet that Apple gave him as income. According to your rationale, he didn't get any cash, so he must he must not have any income.
Clarke, there are plenty of examples of transactions to look at where cash may not change hands with respect to one party, but an expense or income still occurs. The IRS deals with these types of transactions all the time, and in fact, in the particular example we are talking about, the IRS deals with stock option compensation expense by letting the company take an expense for the difference between the market price and strike price at time of exercise.
Which brings the question to mind again that you and Ron have never answered---Why does the IRS so readily recognize this expense that you and Ron call a phantom expense if it so obviously a phantom expense. I wasn't aware that it was so easy to just make up expenses to the IRS on the company reports.
From Senator Levin's link:
When an executive exercises those options, the company can claim a corresponding compensation expense on its tax return, while at the same time employ accounting rules to omit reporting any expense at all on its books (for shareholders). The company can tell Uncle Sam one thing and its shareholders the opposite.
levin.senate.gov
Why should companies try to hide this expense from me as an investor/shareholder? To covertly line insider's pockets? This cover up needs to stop.
Best, Huey |
