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Technology Stocks : Seagate Technology -- Ignore unavailable to you. Want to Upgrade?

To: Stitch who wrote (5753)	9/21/1998 11:34:00 PM
From: DJBEINO	Respond to of 7841

Seagate Technology Inc. wants a $3 million tax break from Uncle Sam. But that's chump change compared to what all Silicon Valley companies could end up paying if the Internal Revenue Service defeats the Scott's Valley chip maker in federal tax court. At issue are stock options, so valuable a currency to Silicon Valley companies, yet so problematic for accounting and tax policy makers. In Seagate Technology v. Commissioner, 19447-97, Seagate seeks to deduct the spread between the fair market stock prices and the reduced rate it gave to research and development employees who exercised their stock options during fiscal 1991, 1992 and 1993. The issue seems painfully arcane, but Silicon Valley tax lawyers are closely watching for developments in the dispute to determine how the IRS treats that valuable spread. If Seagate loses, companies could end up paying millions more in taxes. Like most technology companies, Seagate took R & D tax credits, then transferred the developed technology to a foreign subsidiary. The government says Seagate should not get the full tax break it seeks for stock payouts to employees who worked on that technology. As a result, the IRS claims Seagate must reduce its deduction and heap the difference on the cost-sharing plan it has with its Singapore-based subsidiary, thus increasing the company's taxable income back home. "These option spreads can be monumental," says Paul Sax, a tax partner at Orrick, Herrington & Sutcliffe who is not involved in the case. "You would be hard-pressed to find a Bay Area company without a stock option plan, without ongoing research and development, and most have some sort of cost-sharing plan with a foreign subsidiary." The issue of who gets a deduction among subsidiary companies in the United States is also a tough one when a company grants options and the employee then moves from one subsidiary to another. "On the road from San Jose to San Francisco, you would bump into this problem at every turn," Sax said. At stake are taxes paid by all companies that offer options and work with subsidiaries -- foreign or not -- noted William Hoffman, an employee benefits partner at Gray Cary Ware & Freidenrich in Palo Alto. The IRS has long contended that companies should not take research and development deductions in the United States, then turn the technology over to a foreign entity that can reap the income rewards without paying U.S. income taxes. In response, companies have created cost-sharing plans to pass on to foreign subsidiaries some of the costs of creating a technology. Precisely what costs must be shared -- and at what fair-market value -- are two of the many tax issues still being shaken out by Silicon Valley companies. Paolo "Paul" Dau, a Fenwick & West tax associate in Palo Alto, says the IRS started throwing stock options into the mix in 1993. Coincidentally, that's about the same time the independent Financial Accounting Standards Board started threatening to make companies show the costs of options on their balance sheets. The FASB ultimately ruled that companies should show the cost, but stopped short of forcing companies to count options against earnings. How companies will fare with the IRS is still being decided, and the Seagate case is on the cutting edge. But Dau said he and fellow tax lawyers in the Bay Area are working closely with tax officials to develop policies everyone can live with. "We've tried to develop tax rules that allow for [research] but try to shut down [suspicious] maneuvers," Dau said. Neither Seagate, represented by attorneys from Chicago's Mayer, Brown & Platt, nor the IRS returned calls seeking comment. ljx.com