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To: rkral who wrote (119789)	6/5/2002 2:24:10 PM
From: Stu R	Read Replies (2) \| Respond to of 152472

Ron: Thought that's exactly what I disproved. I must not have done a very good job. What part(s) of my logic do you disagree with? This from the original post: The company receives a "tax credit" on the same amount on which the employee pays taxes. Assume the federal tax rates for the company and the employee are identical, e.g., 33% .. very plausible rates for both. So now the tax amounts are identical, e.g., $20 (per share) of exercised stock. Now let's examine what happened in Uncle Sam's pockets. The employee put $20 in the left pocket. The company took $20 from the right pocket. Sam is no richer or poorer than before. As far as Uncle Sam is concerned, the $20 may just have well gone directly from the employee to the company. (Of course, paying 'taxes' to the company wouldn't fly, so someone had to involve Sam as the middle man.) Since the taxes paid by the employee didn't end up in Uncles Sam's pocket .. we can conclude that we really don't have single taxation with the tax credit. Therefore , the original premise, "to avoid double taxation" without the tax credit, is false. Uncle Sam gets paid the tax from the employee. The company takes a deduction in the amount of the employee's taxable income even though it is not a cash disbursement. If this deduction were not allowed Uncle Sam would get paid twice on the same income. First, the company would pay corporate income tax on its income without allowance for the "option compensation", then the individual would pay individual tax for the same "option compensation". So if IRS didn't allow the deduction it would create a double tax similar to that of dividends. It seems IRS is not the problem in this circumstance (double taxation). I am not referring to Art's point about capital gains versus ordinary income treatment as I am too slow to be up to that part of the discussion yet. My initial reaction to reading the Levin bill posted here earlier is that I don't like it. If the problem is with the financial reporting (expensing of options on the financials) then I don't like Congress trying to force or back into a solution by linking tax code to financial reporting. It seems like a corrupted (not illegal) way to solve a problem. Congress has managed to put together an abomination of a tax code as you have recently peaked into. Why do we want politicians to be messing with financial standards. I believe financial accounting and tax accounting serve two different masters and a clear separation should be maintained. In the wake of Enron the accounting industry is under pressure to make changes. Pressure should be put on the accountants to address the "option expensing" on the financial statements issue (among others) and leave the politicians out of it. On its face the Levin bill concerns me in that it offers a choice of how to report options. This means different methods may be used by different companies. How will this inconsistency of treatment help investors? I think a solution can be found that can be consistently applied as well. Does the Levin bill incentivize companies to inflate its options compensation expense in order to pay less taxes? Can the company then break out this compensation separately and then treat it as a pro forma item or encourage analysts to do so? I think a simple standardized methodology should be developed and see no reason why it cannot be done in the current environment without the help of government. Stu