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Technology Stocks : Cisco Systems, Inc. (CSCO) -- Ignore unavailable to you. Want to Upgrade?

To: Stock Farmer who wrote (57668)	2/19/2002 1:17:29 PM
From: RetiredNow	Respond to of 77400

Point of clarification, John. The IRS is not out any amount from these stock options shenanigans. Non-qualified stock options exercise result in a taxable event, but there is a transference of tax consequences from the company to the employee. So the IRS still gets its money, the company still gets its money, and the employee still gets its money. Everyone gets their money, but the external shareholders. :)

To: Stock Farmer who wrote (57668)	2/19/2002 1:51:55 PM
From: Boca_PETE	Read Replies (3) \| Respond to of 77400

John Shannon: re:("why is it then that the company should have received $6 billions of taxpayer money?") I have posted my belief linked below that the corporate tax deduction for stock option compensation is A GIFT. siliconinvestor.com IMHO the tax law should be changed to remove this corporate welfare provision from the tax code. The only reasons I can think of for its' existence are: (1) that the politicians who wrote and passed the tax code did not understand the economics (cash flows) of employee stock options, and/or (2) the politicians who wrote and passed the tax code intended to provide corporate welfare that most people would not take the trouble to understand in depth. In understanding stock option cash flows and accounting, it's important to distinguish between: - The company and its financial statements with relate solely to company transactions, AND, - Individual shareholders of the company and their individual financial statements which solely reflect the transactions of the shareholder. When the employee-shareholder exercises a stock option, the shareholder gives cash in the amount of the strike price to the company in exchange for the issuance of company shares in the name of the company. - In this situation, both the shareholder and the company have to account for a transaction of economic substance. * The company accounts for the issuance of shares by increasing its assets (cash balance ) and increasing its common stock outstanding. * The employee accounts for the purchase of shares in his/her financial statement by decreasing assets (cash) and investing investment cost basis in the company. When the employee re-sells the above shares to new shareholder in exchange for $21 billion at the height of the mania in March 2000 when share values had risen to the moon. - The employee shareholder accounts for the sale on his/her financial statement by increasing asset (cash) for $21 billion, reducing his/her cost basis in the company stock to zero (the strike price originally paid to the company to buy the shares under option), and recognizes the obscene profit as a gain on the employee's Form 1040 (Schedule D) individual income tax return. (This transaction has nothing to do with the company and so the company has nothing to record on its financial statements as a result of it). - The new shareholder buying the shares from the employee-shareholder accounts for the transaction on his/her individual financial statement by reducing assets (cash) for $21 billion and increasing his/her investment cost basis in the company by the $21 billion cost paid to the employee-shareholder. (This transaction also has nothing to do with the company and so the company has nothing to record on its financial statements as a result of it). Hopefully you can now see that when shareholders buy and sell to each other, there is not economic (cash) impact on the company in which the shares represent an ownership interest. Since the company is not shelling out any money (cash, other assets, reductions in liabilities...), then any amount the company records as stock option compensation expense (no matter how complex the calculation is) is a total fiction that does not coincide with the economic reality of applicable cash flows. The huge profits successful employees make on their stock options are entirely funded by shareholders independent of the company willing to pay the price THEY PERCEIVE AT THE TIME as fair value (assumed to be their perception of the present value of future earnings and dividends). Hoepfully we can agree to disagree if the above has not clarified my viewpoint adequately. P