Wednesday, November 12, 2008
A tax cut even I think is asinine
I am a corporate tool and I love tax cuts for the rich, but even I think that this rifle-shot tax cut, slipped into the TARP, is stupid. The interesting question is whether it was tossed in to attract the votes of those recalcitrant House Republicans, or whether Nancy Pelosi slipped it by to benefit California technology entrepreneurs who took a bath when the NASDAQ tanked at the end of the Clinton administration. My nose picks Door Number Two, but I could be wrong.
11 Comments:
By 
, at
Wed Nov 12, 10:19:00 AM:
This is what is normally called a technical correction, and it is a whopper. I have heard it discussed at continuing education seminars for tax professionals over the last couple of years.
In this case the law as written created an especially unfair and burdensome outcome, because of the specific circumstances of the timing of option grants (when the income effect to the recipient is measured) and the later exercise date, when an unforeseen tech sector crash made the options worthless.
If the recipient had a tax liability but no way to generate cash income to settle the liability, it created an unfair hardship on a pretty significant scale.
Many technical corrections that should occur don't get passed by Congress. This one did pass, even a hostile Member of Congress had to concede that receiving an option grant that creates a $2million tax liability followed by a share price crash leaving the recipient with no cash was not the intended result of the law prior to the correction.
H R Blockhead
By 
Escort81, at
Wed Nov 12, 01:13:00 PM:
I agree it looks like a technical correction.
I know someone that worked for a spinoff of CMGI (one of the hot internet bubble companies of the 1990s) that had this problem -- exercised options, generated ordinary income, stock tanked quickly as the bubble burst, he had pressure not to sell and was not in a "window" anyway, no cash to pay the tax. Bad deal. But this was nearly a decade ago -- and Congress is just dealing with it now?
By , at
Wed Nov 12, 02:09:00 PM:
HR Blockhead, your comment is inaccurate. As Escort81 correctly notes, it's the exercise of the options that created alternative minimum taxable income, not the grant.
For both of you, this is NOT a technical correction. Technical corrections are designed to fix typos and places where the statute, as written, does not produce the result that everyone intended it to produce. Consequently, technical corrections have, by definition, Joint-Committee revenue scores of zero. This provision was a substantive change in the law, with a significant (though not huge) revenue score.
This was not slipped in at the last minute. It had previously passed each of the House and the Senate, but never in the context of a bill that made it all the way.
The primary equitable argument for this provision is that the tech-stock crash produced a lot of situations where people owed tax in an amount much greater than the economic benefit they received. This tough outsome resulted, in part, from the extremely counterintuitive way that the AMT credit worked.
Personally, I favored this provision. I'm a tax lawyer and represented an individual who worked for one of the big-name tech companines and got caught in this problem. The advice he received from his accountant at the time left a lot to be desired. The process of attempting to compromise this liability -- which exceeded my client's net worth -- with the IRS also proved unsatisfactory. For years on end, I bobbed and weaved, keeping the IRS from levying on his assets and hoping and praying that Congress would ride to the rescue. Needless to say, I now have a very happy client.
Is the recently enacted provision good policy? I see two sides to that question. I think this is no more, and no less, objectionable than a lot of bailouts.
--Scurvy Oaks
By , at
Wed Nov 12, 02:15:00 PM:
On the politics of it, this provision had bipartisan support, mostly from representatives with significant numbers of tech-company employees in their districts. That stretched across the political spectrum from Zoe Lofgren (D-CA) and Richard Neal (D-MA) to Sam Johnson (R-TX), and ultimately included Sen. Chuck Grassley, who made a floor statement on the provision when it was part of the extenders package.
--Scurvy Oaks
By Escort81, at
Wed Nov 12, 03:22:00 PM:
Scurvy -
Thanks for the clarification -- of course this is not a "technical correction" as you point out -- it is hardly a typo. I just meant to say that it looks like one.
Congratulations on your happy client, and congratualtions also for being in a growth industry when there are not many around at the moment.
Does it not seem like a long time from triggering event (I don't know how long your specific client dealt with this) to resolution?
I assume you would always advise an option exercisor to sell enough stock to generate enough net cash to pay the estimated tax liability on the original exercise. Or better still, have the company have a different kind of contingent payment scheme that is cleaner overall!
By Purple Avenger, at
Wed Nov 12, 04:13:00 PM:
If the recipient had a tax liability but no way to generate cash income to settle the liability, it created an unfair hardship on a pretty significant scale.
We got no similar help when my dad died right as the WorldCom scandal broke.
He left no will and the probate judge stalled for 6 months before giving anyone administrator authority.
Cost basis was established at time of death, and by the time anyone had authority to try and sell anything, it was near worthless leaving us a inheritance tax liability on worthless securities.
By Escort81, at
Wed Nov 12, 04:45:00 PM:
PA - You got screwed by the probate court, and the fact that your father died intestate, notwithstanding that he owned securities, and the incredibly bad luck of the timing of the meltdown.
I imagine you do have a will in place to make sure that doesn't happen to your family going forward.
Couldn't the estate have distrubuted the worthless stock to the beneficiaries to let them use the capital loss to offset their own gains, if any? At the very least, they could carry forward that capital loss to offset future gains. Small consolation, I realize.
By davod, at
Wed Nov 12, 06:13:00 PM:
Is this one of those "It is ok for me but not for thee" situations.
By Purple Avenger, at
Wed Nov 12, 06:54:00 PM:
Couldn't the estate have distrubuted the worthless stock to the beneficiaries to let them use the capital loss to offset their own gains, if any?
Don't know about that. I'd bet that value is established at time of transfer though.
Dad wasn't planning on dying. A "routine" heart bypass operation went bad and that was it. Pretty sudden.
His attitude always was he didn't want a will. "let'em fight over it" he'd always say. Nobody fought over anything though ;->
By , at
Wed Nov 12, 07:10:00 PM:
My nose picks Door Number Two, but I could be wrong.
I guess that's better than having Door Number Two pick your nose.
By Escort81, at
Thu Nov 13, 12:19:00 PM:
PA - Under current estate tax law, there is a step-up in basis as of the date of death, so the cost basis of any stock distributed to beneficiaries at a later date is the date of death valuation. If a beneficiary then sells the stock at a lower price than the date of death valuation, there is a capital loss generated, which can be used to offset capital gains. If the beneficiary sells the stock at a higher price than the date of death valuation, there is a capital gain, which of course is taxable -- the rate on gains will presumably be going up next year, possibly to 20%, possibly higher. There have been proposals floating around Congress that would do away with the step-up in basis with respect to estate tax law, such that beneficiaries inherit the cost basis of the testator (which could be quite low for long-held assets); that was usually married up to a proposal that exempts the first $5-6 million or so of an estate from any tax. I believe the Obama plank stated that he intended to freeze the exemption at the 2009 level of $3.5 million, though of course it remains to be seen what actually happens.
Sorry to hear about your father's untimely passing. I suppose there isn't such a thing as low risk when surgeons crack open your chest. It's great that nobody fought over anything, though.
