140 research outputs found
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Employee Stock Options: Tax Treatment and Tax Issues
[Excerpt] The practice of granting a company’s employees, officers, and directors options to purchase the company’s stock has become widespread among American businesses. According to Information Technology Associates, 15% to 20% of public companies offer stock options to employees as a part of their compensation package, and over 10 million employees receive them. During the technology company boom of the 1990s, they were especially important to start-up companies, allowing them to avoid paying large cash salaries to attract talent.
Employee stock options have been extolled as innovative compensation plans benefitting companies, stockholders, and employees. They have been condemned as schemes to enrich insiders at the expense of ordinary stockholders and as tax avoidance devices.
This report explains the tax treatment of various types of employee stock options recognized by the Internal Revenue Code, examines some of the issues that have arisen because of the real and perceived tax benefits accorded employee stock options, and describes key laws and regulations concerning stock options, and discusses the “book-tax” gap as it relates to stock options and S. 1375 (Ending Excessive Corporate Deductions for Stock Options Act)
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Chrysler Corporation Loan Guarantee Acto of 1979: Background, Provisions, and Cost
[Excerpt] The American automobile industry has serious financial problems. Corporate executives from the Big Three (General Motors, Ford, and Chrysler) have testified before Congress about their need for federal credit (direct loans and guaranteed loans). This report examines the Chrysler loan guarantee program for possible insights that could assist Members of Congress in evaluating proposals to provide federal credit assistance.
In 1979, Chrysler applied for federal loan guarantees. In 1979 and 1980, the economy was in recession and the price of oil had unexpectedly increased dramatically. However, at that time there was no financial liquidity crisis, as is the case today. Most of the arguments for and against the proposed Chrysler loan guarantee program are relevant to current proposals for credit assistance to the Big Three. For example, in the 1979 debate, proponents argued that the Chrysler loan guarantee would save many jobs. But opponents contended that the financial capital obtained for Chrysler by the proposed loan guarantee would have been used by other firms to expand their productive facilities, output, and employment. Thus, any Chrysler job losses could be offset by gains at other firms.
Provisions in the Chrysler Loan Guarantee Act of 1979 included the establishment of a Chrysler Loan Guarantee Board, extensive federal oversight of Chrysler’s operations, detailed reporting requirements by Chrysler’s management, shared sacrifice of parties benefiting from the loan guarantee, and protection of the federal government’s interest.
Chrysler used federal loan guarantees to borrow 1.5 billion available and redeemed its guaranteed loans in 1982. Some critics argued that Chrysler was only able to return to profitability because of the imposition by the U.S. government of “voluntary” import quotas on Japanese vehicles. In 1980, the Chrysler loan guarantee was treated as a contingent liability with no initial cost at the time the guarantee was provided. Because Chrysler repaid all of its guaranteed loans, the U.S. government incurred no budgetary cost. Furthermore, the U.S. government received warrants to buy Chrysler stock, which it subsequently sold at auction to Chrysler for $311 million. Thus, it can be argued that the U.S. government made a profit from the loan guarantee program.
Currently, the Federal Credit Reform Act requires that the reported budgetary cost of a credit program equal the estimated subsidy costs to the taxpayer at the time the credit is provided. For proposed legislation establishing a new credit program, the Congressional Budget Office is responsible for making the initial estimate of the subsidy cost. Once legislation has been enacted, the Office of Management and Budget estimates the subsidy cost on the credit program. An appropriation for the annual subsidy cost of each credit program is made into a budget account called a “credit program” account. Thus, under today’s budgetary rule, legislation providing direct loans or loan guarantees to assist the automobile industry would require the inclusion of the estimated subsidy cost, which would require an appropriation of budget authority.
This report will be updated as issues develop and/or in the event of new legislation
Stock Options: The Backdating Issue
[Excerpt] Employee stock options are contracts giving employees the right to buy the company’s common stock at a specified exercise price, at a specified time or during a specified period, and after a specified vesting period. The value of the option when granted lies in the prospect that the market price of the company’s stock will increase by the time the option is exercised (used to purchase stock). At the grant date for the options, rather than selecting an exercise price based on the current market price for the stock, officials at some companies have selected a prior date with a lower market price; that is, they backdated stock options to an earlier grant date. If this backdating occurred without public disclosure, the recipient of the stock options received increased compensation in violation of Securities and Exchange Commission (SEC) regulations, generally accepted accounting rules, and tax laws. Some backdating is said to involve “sloppiness,” not fraud. The backdating of stock options has imposed costs on shareholders, employees, bondholders, and taxpayers.
A corporate official who has profited from undisclosed backdating of stock options may not be responsible or even knowledgeable of the backdating. “Nonqualified” stock options, which have no special tax criteria to meet, are the focus of the backdating controversy primarily because they can be granted in unlimited amounts.
The magnitude of stock option grants grew dramatically in the 1990s, subsequent to passage of the Omnibus Budget Reconciliation Act of 1993, a stock market boom, and revised accounting rules. Recent corporate disclosure changes have reduced the opportunities and rewards for backdating stock options. Empirical studies about backdating have been done by academics and investigative journalists. Four recent regulatory actions may have reduced the backdating of stock options, but problems persist. On December 16, 2004, the Financial Accounting Standards Board issued new rules requiring companies to subtract the expense of options from their earnings. After August 29, 2002, the Sarbanes-Oxley Act required that companies notify the SEC within two business days after granting stock options. In 2003, the SEC required increased disclosure of stock option plans. The SEC issued enhanced option grant disclosure rules effective December 15, 2006. Policy options to further reduce backdating and other timing manipulation include changes in SEC regulations and a change in the tax law.
The SEC, various state prosecutorial, and Department of Justice (DOJ) probes into backdating abuses are ongoing. In addition, many firms have mounted their own internal probes into possible abuses. By November 2007, the SEC’s investigation caseload had fallen from a peak of 160 to about 80, and the SEC had brought civil enforcement actions against seven companies and 26 former executives associated with 15 firms. And according to reports from the DOJ, there were at least 10 criminal filings against defendants for backdating. As of January 2, 2008, the only CEO to be convicted of charges related to backdating was Greg Reyes, former Brocade CEO.
This report will be updated as issues develop or new legislation is introduced
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CRS Issue Briefs
The idea of replacing our current income tax system with a "flat-rate tax" is receiving renewed congressional interest. This report contains information on recent developments regarding flat-rate taxes, the relationship between income and consumption, international comparisons, other fundamental tax reforms, and descriptions of selected proposals
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CRS Issue Briefs
This report discusses the idea of replacing our current income tax system with a flat-rate tax, including background and analysis and various Congressional proposals
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111th Congress
This report primarily covers fundamental tax reform by discussing background and proposals for review during the 111th Congress. It includes sections about fundamental tax reform, the relationship between income and consumption, what should be taxed, types of broad-based consumption taxes, international comparisons, other types of fundamental tax reform, legislative proposals and other legislation, and sections looking at other specific kinds of taxation
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War Bonds in the Second World War: A Model for Hurricane Recovery Bonds?
Severe damage and dislocations resulting from Hurricanes Katrina and Rita have
rekindled congressional interest in the concept of the sale of a Treasury security to
finance recovery and relief operations. The question has been raised whether or not the
issuance of war bonds during the Second World War serves as a good model for new
“hurricane recovery bonds.” Two bills have been introduced that would permit the
issuance of some form of hurricane relief bond: H.R. 3892 and H.R. 3935
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CRS Issue Briefs
This report details information regarding value-added tax as a new revenue source. Information such as background, analysis, and legislation is included
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Should Credit Unions Be Taxed?
Credit unions are financial cooperatives organized by people with a common
bond; they are the only depository institutions that are exempt from the federal
corporate income tax. As financial cooperatives, credit unions only accept deposits
of members and make loans only to members, other credit unions, or credit union
organizations. Many Members of Congress advocate a reliance on market forces
rather than tax policy to allocate resources. Furthermore, some Members of Congress
are interested in additional sources of revenue in order to either reduce the deficit,
offset the cost of higher federal outlays, or make up for tax cuts elsewhere.
Consequently, the exemption of credit unions from federal income taxes has been
questioned
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