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To: Art Bechhoefer who wrote (121759)	7/18/2002 5:26:31 PM
From: sal99	Read Replies (1) \| Respond to of 152472

Art, I like your reasoning better, but the ugly reality is that in your scenario, when the employee exercises at market price of $50, $25 of regular income hits his W-2 (no matter how long the option was held). Any increase over the new basis of $50 will be subject to the capital gains rate (assuming it's held over a year from exercise date). --Sal

To: Art Bechhoefer who wrote (121759)	7/18/2002 5:33:57 PM
From: kech	Read Replies (2) \| Respond to of 152472

Art - I have been reading up on this at the following Link. cei.org To paraphrase it indicates that the usual case is that companies issue options that are not "in the money". In your example, the stock should be more like 25 when an option is granted to buy at 30. In this case, for financial accounting, firms may choose the "intrinsic" or the "fair value" method (explained on p. 11). Almost all firms use "intrinsic" and under this the option is expensed as zero since its strike price is higher than the current market value. However, what is interesting is that for tax purposes, the company is able to expense the difference between the strike price and the stock price when exercised as an expense, and the employee pays income tax on this same amount. If the employee then holds the stock and sells it after a year, there is then a capital gain paid on the difference between his basis (the former strike price) and whatever the new stock price is. The "fair value" method is the Black Scholes method and the article explains why most firms avoid using it. The key point here is that firms do different things for "financial accounting/reporting " purposes than they do for "tax reporting" purposes.

To: Art Bechhoefer who wrote (121759)	7/18/2002 5:56:24 PM
From: gdichaz	Read Replies (2) \| Respond to of 152472

Art: [ >> employees are subject to regular earned income tax rates for the difference between the option cost and the market price at exercise<< sal, this seems a little confusing. ] The taxing of the difference between the option cost to the person granted the option and the market price on the date of exercise as regular earned income may indeed be "a little confusing" as you say, or even unfair since several years may have passed, but it is current practice by the IRS. A "fix" to the option situation could perhaps be found in how the company granting the option and the person to whom the option is granted are taxed - which seems designed to maximize taxes paid to the USG - and by hitting the individual, not the company. Hopefully the question of options accounting and their taxation can be worked out in a calm atmosphere rather than the highly charged cirus atmosphere at present with both parties trying to position themselves in the best light prior to the November election. Best. Chaz PS On a different subject, is tomorrow (Friday) the last day before option expiration for this month?