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

To: Don Lloyd who wrote (16452)	8/13/2002 2:10:21 AM
From: Simba	Read Replies (3) \| Respond to of 42834

Don, You write: <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. > It is clear that the long-term buy-and-holder does not suffer any cash costs nor does the company when options exercised. I would even go one step further and say that even the shareholder who sells the stock in the same quarter may not experience a cash loss if the stock price does not change due to the exercise of the stock options by the insider. This can be artificially achieved by buybacks timed nicely in the same quarter to offset the selling pressure from the insiders. This was routinely done by many corps such as IBM, DELL etc during the mania. < 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. > I think I am being "audited" every year in April when I submit my tax returns. In my opinion anybody who presents a W-2 is some sense being "audited" by the IRS. Try not submitting one without an extension. < 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. > This is where we differ. I am not an accounting or tax expert but there is no "requirement" for a tax deduction because the employee paid taxes on the mercurial gains in his options. Non entity (the shareholder or the company) had a direct cash expense to the employee. Clearly there was an indirect expense which is said to be difficult to estimate but to say that it constitutes cash expense to be claimed by the company is far-fetched. To summarize the position is clear. Long term buy-and-holders do not have any cash expense that is used to compensate the employee options. The company also does not. The option gain for an employee is a result of many factors including company products, sales, execution, pricing of the option, buybacks, random walk of the company stock price at any instant. Just as the mania created huge tax income to the state and national accounts due to capital gains where ever rising prices led to a stock-swapping mania, the option gains created some tax revenue to the IRS. The long term shareholders equity got hurt in the process due to dilution. The company issuing options has two choices, estimate the option expense using one of many accepted accounting practices to evaluate options and claim the tax credit from IRS or like John Chambers of Cisco say that they don't know how or don't want to accept/estimate the expense but become ineleigible for tax deductions. It is that simple. I think John McCain and Carl Levins bill basically captures the essence of my thoughts and they have it mostly right. If not for all the Silicon Valley lobby money pouring into the campaign coffers of both parties this bill would be passed by now. It is just a matter of time before FASB adhers to the IASB and this issue is nailed. BTW, this link shows the damage of the stock option schemes to 401Ks and pension funds: fortune.com Simba