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By Michael Gray

No Sympathy For Stock Option "Losers"?

From a reader:

I'm not sure if I agree with you on this particular issue (retroactive repeal of alternative minimum tax for incentive stock options and other proposals discussed in the April 20 Option Alert.) Jeff Chou was at Granite Systems when Cisco purchased them which was at least 4 years ago. Why didn't he exercise earlier? He decided to take a chance and exercise when Cisco stock was at 60 and he lost. This AMT thing is an unfortunate section in the tax code, but why wasn't he a more vocal advocate before? Didn't he understand the rules of the game before he played? I've always tried to exercise ASAP to avoid this. It's hard to have much sympathy for the situation that he got himself into.

Mike

Thanks for writing about your thoughts on this issue, Mike.

Maybe you're right and Jeff Chou was a victim of his own greed. At least he volunteered to "go public" and provide a web site forum as an instrument of change. Until people agree to share their misfortune with the public, it's hard to make the issue concrete to enact changes that should be made.

Yes, Jeff lost. He owes more tax on "paper profits" than he has assets to liquidate to pay them. Should our tax system be like a loan shark or bookie, collecting on taxpayers' gambling debts? Should our tax system be structured in such a way as to make this necessary?

It seems to me and to other commenters that the social goal of equity incentives is to encourage long-term participation through ownership in the employer. Our current structure encourages employees to sell their stock as soon as possible, certainly no later than long-term gain benefits have been secured for ISOs.

My experience with many engineers is they are "keeping their nose to the grindstone" and aren't paying the attention they should be to their stock options and the related tax consequences of exercising them and holding or selling the stock. I don't think it's appropriate to hit them with a great big stick because they are working hard and are oblivious to the tax system. Why does it need to be so complicated?

I have heard from many people who are suffering because of bad advice they received from their tax advisors or from their employers. They should be considering filing malpractice claims against their tax advisors.

The crash of the stock market during 2000 and early 2001 has resulted in the erasure of an enormous amount of wealth. It's bound to result in hardships. We have relief for people in disaster areas from storms and earthquakes. It may be there should be some assistance or tax relief for those who suffered in the market crash disaster.

Try to have a little compassion for the suffering of others, even if it is a result of their own carelessness or from bad advice.

There will be tax legislation passed of some sort this year. Please urge your representatives in Congress to include relief provisions as suggested in the April 20 Option Alert.

IRS Circular 230 Disclosure:

As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

Consult with a tax advisor

For our readers who aren’t tax advisors, this newsletter is intended to alert you about tax issues that could affect you. It is not a substitute for advice from a professional tax advisor. You will find that getting advice from a qualified advisor is a worthwhile investment. We intend to eventually publish a directory of ESOAA members who are committed to helping clients with employee stock option issues.

Tax advisors should view the newsletter as an alert to become aware of issues relating to employee stock options for further research and study.

(Michael Gray is the co-author of Employee Stock Options – A Strategic Planning Guide for the 21st Century Optionaire. You can order the book at http://www.amazon.com or http://www.barnesandnoble.com/ or buy it at Stacey’s Books.)

P.S.

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