May 13, 2002 5:05 PM PDT

Tech execs fight against stock-plan tax

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New IRS rules may diminish stock perks

April 29, 2002
Tax experts from Microsoft and Texas Instruments are among speakers expected to testify Tuesday at a hearing before the Internal Revenue Service and the U.S. Treasury Department in opposition to proposed taxes on stock incentive programs.

Also on the agenda are speakers from computer networking equipment maker Ciena, the American Payroll Association, the National Association of Stock Plan Professionals and the Securities Industry Association.

The IRS plans to impose payroll taxes on incentive stock options and employee stock purchase plans (ESPP) beginning Jan. 1, 2003. The taxes already apply to some stock plans, but this rule would extend the taxes to ESPPs and other currently exempt plans that are widely used in the computer industry to recruit and reward staff.

Since the IRS announced its plan in November, more than 18,000 workers and 2,000 companies have sent e-mail messages to the U.S Treasury Department and lawmakers in Washington voicing opposition to the proposed rule, according to the American Benefits Council, an employee benefits lobbying group. The IRS would collect an additional $23 billion in taxes over the next 10 years should the rule go into effect, according to a congressional tax committee.

Two bills proposing to overturn the new IRS regulation are before the Senate, which is expected to vote on them this summer. One, sponsored by Rep. Amo Houghton, R-N.Y., is attached to the Pension Security Act, HR 3762, which passed a House vote in April. The other, S. 1383, is sponsored by Sen. Pat Roberts, R-Kan., and Sen. Hillary Clinton, D-N.Y.

"This is a very significant tax increase on rank-and-file workers," said James Delaplane, Jr., a vice president of the American Benefits Council, which is leading a coalition of 80 companies actively voicing opposition to the IRS regulation. "Policy-makers will not countenance that kind of increase in an election year."

Under the proposed rule, employees would immediately owe Social Security and Medicare taxes, about 7.5 percent, on the spread between the exercise price of a stock option and the market price of the stock the day they exercise the option. For ESPPs, workers would owe the taxes on the difference between the discounted price of the stock and the market price on the day they purchase stock under the plan.

Unless workers were to sell the stock the same day they exercised it, they would owe taxes on earnings they had yet to receive. And employers would be required to pay the IRS a matching amount.

Opponents of the proposed rule say the additional costs and hassle of administering taxes on non-cash compensation would cause many companies offering such plans to reconsider whether to provide them at all.

 

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