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IP: RE: Absurd multi-billion dollar deductions eradicate Cisco, Micro soft federal tax liabilit Good Morning Silicon Valley Tue Oct 10 12:00:13 EDT 2000
From: Dave Farber <farber () cis upenn edu>
Date: Tue, 10 Oct 2000 20:50:58 -0400
From: John Shoch <shoch () alloyventures com> To: "'farber () cis upenn edu'" <farber () cis upenn edu> Cc: John Shoch <shoch () alloyventures com> Dave, As usual, these issues may be a bit more complicated than they seem. I am only an amateur financial engineer, but here are some of the standard observations, not well reported in the article in the Chronicle: --The gain on the stock is viewed as a form of compensation, received by employees who sell. Thus, the gain on that stock IS being taxed, but it's being taxed on the tax returns of the employees. --Alternatively, if the companies chose to pay an equivalent amount in bonuses, they could still deduct those as business expenses, and the employees would still pay the tax on their gains. --Thus, this structure tries to make it "tax neutral" if the company wants to compensate people with cash or stock. If the employee got taxed but the company got no deduction, they would never give out stock options. --By incenting employees with stock the company does avoid the cash expense of the equivalent compensation, but the company does pay a price for this on the balance sheet: when exercised the options become shares in the company, increasing the share count. This dilution will reduce the effective earnings per share, potentially reducing the value of the stock. --The real benefit, though, is that the options are a form of performance-based incentive: a) the employee gets the gain, and b) the Treasury gets their tax payments, and c) the company gets hit with the dilutive effect of the options -- ONLY if the stock is doing well. Of course, both sides of this are a lot more complicated.... John Shoch Alloy Ventures. -----Original Message----- From: Dave Farber [mailto:farber () cis upenn edu] Sent: Tuesday, October 10, 2000 4:47 PM To: ip-sub-1 () majordomo pobox com Subject: IP: Absurd multi-billion dollar deductions eradicate Cisco, Microsoft federal tax liabilit Good Morning Silicon Valley Tue Oct 10 12:00:13 EDT 2000Absurd multi-billion dollar deductions eradicate Cisco, Microsoft federal tax liability: Although the annual reports of both companies made it appear that they had paid billions of dollars in federal income taxes, <http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2000/10/09/MN3707.DTL>CiscoSystems and Microsoft reportedly paid no federal income tax last year. By leveraging a sorely outdated corporate tax break that allows a company to offset tax liability by deducting gains employees realize from stock options during the company's most recent fiscal year, Cisco was able to eradicate $1.8 billion in federal taxes. Microsoft was reportedly able to avoid a tax liability of about $4.74 billion. As one might imagine, the practice has drawn no small amount of criticism. As Jon Coupal, president of the Howard Jarvis Taxpayers Association said, "for a company that makes that kind of money not to pay taxes raises serious tax-equity questions."
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- IP: RE: Absurd multi-billion dollar deductions eradicate Cisco, Micro soft federal tax liabilit Good Morning Silicon Valley Tue Oct 10 12:00:13 EDT 2000 Dave Farber (Oct 10)