AMT Tax Relief

Dear Representative Lofgren,

I know you are well intentioned with your AMT Tax Relief bill. I myself, as a technology worker, would benefit significantly from this bill. However, I oppose it as I think you are missing a few important aspects of this situation:

1. People are in this mess because they were pursuing ways to reduce their tax burden in the future, by buying options now and holding them for long term capital gains later. In other words, they weren't satisfied with the (as an example) windfall $85/share with a 39% marginal tax rate. They wanted even more. And they more they wanted was to come from the taxes they owed, not additional gains they made.

2. They were ignorant of the tax consequences of their actions even though all the stock option plan documentation I've ever seen warns of "tax consequences" and advises people to get expert help.

These are our best and brightest and many times most libertarian citizens. Now, faced with huge tax bills because they failed to read the warnings, and hoist by the petard of their own greed, they come hat in hand to the government looking for relief. I have little sympathy for them. If we expect anyone to know better, it should be this class of people. Why not put the same energy into laws to protect the less literate from onerous credit charges that they are saddled with because they failed to read the fine print? Are these AMT relief seekers not the same people who would blame other victims for being "too ignorant"? This kind of "bail out" of the rich is just another in a long list of "perks" that are available to only the elite in our society.

As Frederick Hayek warned in The Road to Serfdom

"It is not surprising that entrepreneurs should like to enjoy both the high income which in a competitive society the successful ones among them gain, and the security of a civil servant."

By this bill and other favors to the rich, we take the risks away. This is a safety net 10,000 feet off the ground. Your bill need not remove the penalty for slipping up, only the advantages of flying so high. Simply remove the ability to get long term capital gains by pre-purchasing options.

All that aside, my main problem is with those who weaseled out of this situation entirely by having their company buy back their stock options.

I wrote to Mark Schwanhausser of the Mercury News about this in response to his article on the subject your bill addresses. Below is the thread of the exchange I had with Mark.



Subject: Many investors running out of options


I "enjoyed" your story, but I thought it was incomplete. It didn't mention that some astute investors managed to have their company rescind their stock options and buy back the stock. This is particularly upsetting to me on several counts. It's often said that tech execs deserve their high compensation because they take enormous downside risks. But in this case, they took risks on the stock which would have reduced their tax liability on the upside, but were able to reduce their risk to zero by having the whole thing rescinded.

They didn't even lose their original purchase price. (See story by Floyd Norris, AP. Copied below). This just adds to the long list of opportunities for executives to access sources of income not available to mere mortals. Among the list is friends and family stock programs, loans to cover purchase of stock options and compensation to cover "excess" tax liability.

I know several people who bought luxury cars and other artifacts on the basis of sale of friends and family stock as if it were "free money." A windfall that could be spent without a care. Now we see that the stock sold at the high may be someone's home in San Diego or college education in Ohio or retirement savings in Oregon.


If the Stock Falls, Cancel Purchases

Did you make the mistake of buying a highflying stock last spring, one whose price collapsed by the end of the year? Wouldn't you like to cancel the purchase, to get your money back and forget the whole thing? You can't cancel the trade, of course. But there is a fair chance that the chief executive or other top officer of that company was allowed to cancel his or her own purchases of company stock. The "rescission" of exercised stock options is the latest fad in corporate executive suites. The accountants are now debating how to account for the transaction, and whether companies that make such gifts to their executives ought to suffer an earnings reduction as a consequence. But so far there has been little attention given to the most important question: Will the companies be forced to tell their owners - the shareholders - whether this new benefit was given to senior managers? Accountants from major firms say privately that they are auditing numerous companies that allowed executives in December to rescind their exercise of stock options earlier in the year. So far, no names of companies that did it have become public. Let's take a made-up company, one we'll call Internet Mania. Back in March, when Mania's share price was $100, an executive exercised stock options to buy 10,000 shares of the company's stock for $10 each, or a cost of $100,000. Come December, the stock had fallen to $5 a share, and the executive faced a tax bill greater than the value of the stock he now owned. So the company obligingly allowed him to cancel the purchase. There is a reason this came into being last year. It is technology companies that have been the most liberal with stock options, and 2000 was the year that many such stocks crumbled. From March 10 through the end of the year, the Nasdaq computer index fell 56 percent, but the median stock in the index was down 79 percent. There were a lot of rueful stock purchasers. It is not clear whether some executives who canceled their purchases had sold the stock as soon as they exercised the options. The sale of the stock would not, of course, be rescinded. But that would be fine with the executive, since he received a high price. He would have to come up with other shares to turn into the company. Under current rules, companies can often issue stock options without even getting permission from their shareholders. The Securities and Exchange Commission has been pushing to change that, but has run into resistance from Nasdaq, where many companies see no need to involve the shareholders in such decisions. The emergence of rescinded stock options shows that new rules are needed to bar such rescissions unless shareholders vote to allow them. Companies that allow rescissions have to return the money paid to buy the shares and lose tax benefits they would otherwise get. "There are cash-flow consequences, and shareholders should be aware of them," said Jane Adams, an accounting analyst at Credit Suisse First Boston. Many companies may be able to avoid disclosing what happened, simply because the amounts will be relatively small. But the fact that companies did this is important to shareholders, even if not much money is involved, and the S.E.C. should require disclosures - including the names of executives who benefited - in corporate proxies. Let the companies explain why it was necessary to assure that a falling stock price did not hurt the bosses.