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 <farber () cis upenn edu>]

> 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 2000
>
>
>
> > Absurd 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>Cisco
> > Systems 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."