Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Bob Brinker: Market Savant & Radio Host -- Ignore unavailable to you. Want to Upgrade?

To: Simba who wrote (16449)	8/9/2002 4:17:38 PM
From: Don Lloyd	Read Replies (1) \| Respond to of 42834

Simba, I think you did not get my point. First of all no cash is being paid by the shareholder to the optionee directly. There is no direct cash expense for the shareholder. You are imputing this expense from the taxed being paid by the optionee but the same expense can be imputed to the corporation as well. This is particularly true for a buy-and-holder of the stock. He never sells so you cannot even impute a cash expense on such a shareholder. In particular the shareholder cannot show an expense or a capital loss on his W2 just like he cannot do so on any stock that he has not yet sold at a loss. The CEO and CFOs of Intel, CSCO claim it is unfair to show a non-cash expense at the time (read quarter) of exercise of the stock. Their claim is accounting experts have no clear method to charge the expense, the amount of it and also the timing of it. The same issues exist for the shareholder who has did not sell in the same quarter as when the options are exercised. He does not have a capital loss (or a cash expense) until he sells. The company should not get a tax deduction for this and get artificial saving which they can re-invest compared to a company which pays expense by direct cash or stock. Basically the CEOs who do not want to take a non-cash expense cannot have the cake and eat it too. Either take a non-cash expense with its attendant difficulties or don't take it but then become ineligible for the tax deduction. Your claim about the shareholder not suffering a cash cost from dilution until he sells may be right in a narrow, literal sense, but not in terms of economic reality. Your claim is equivalent to telling your margin account broker that the fact that all of your stocks fell by 90% yesterday doesn't justify your getting a margin call because you haven't sold anything yet. Cash cost to the shareholder is not at issue because he is not, and is never the entity being audited. Economic reality is the standard here. The requirement for a tax deduction comes from the tax paid by the employee. Option grants ARE a compensation expense directly to the shareholder. Cash salary is also a compensation expense to the shareholder, passed indirectly through the company. Tax deductions applied to the company satisfy the need to offset the compensation expenses to the shareholder in both cases. The fact that the CEOs make silly arguments does nothing to alter the fact that economic reality demands that the shareholders only suffer the injury of ownership dilution, and not the double counting of a phantom income statement expense as well. The real issue is not cash vs non cash, but rather the fact that a company owning its own shares has no economic asset, and no scarcity value as shares can be produced without either limit or expense except for the dilution of share distribution outside of the possession of the company. Self-owned shares are similar to holding an IOU you write to yourself. Regards, Don