Senate will examine stock option bill.

The Senate Committee on Finance will hold hearings on a bill that would limit the deduction for compensation in the form of stock options. The bill (S 576), introduced by Senators Carl Levin (D-Mich.) and John McCain (R-Ariz.), would require a company to record stock options as an expense in the financial statements if it claimed them as a deduction for tax purposes. "This issue deserves the critical analysis that an open committee process can provide," said Levin.

At issue in the legislation is what Levin has called a corporate loophole that allows companies to deduct from their income taxes multimillion-dollar pay expenses that never show up on the financial statements as an expense. "Every other form of compensation is shown as an expense on the company books," said Levin. He said either a stock option lowers company earnings or it doesn't.

S 576 would limit the amount of Internal Revenue Code section 41 research tax credit a company could claim based on stock option wages. It also would establish an exemption for stock option plans that benefit all full-time employees. According to Levin, a 1994 survey of 6,000 publicly traded companies found that only 1% offer stock option compensation to anyone other than management, and 97% of stock options issued were going to 15 or fewer persons per company. "Our bill would ensure that closing the stock option tax loophole does not affect the pay of average workers," said Levin.

A heated, but long standing, issue

The American Institute of CPAs publicly opposed the Levin-McCain bill because it would inappropriately inject Congress into the accounting standard-setting process. In a letter for Finance Committee Chairman William V. Roth, Jr. (R-Del.), and Senator Daniel Patrick Moynihan (D-N.Y.), AICPA tax executive committee chairman Michael E. Mares said the tax treatment of stock options should not be governed by accounting standards and that Congress should "leave financial accounting standards to the Financial Accounting Standards Board." He said strict Securities and Exchange Commission and Internal Revenue Service regulatory standards already were in place for stock option grants and S 576 violated fundamental principles of tax policy.

In 1994, the FASB issued a proposal to require companies to recognize stock compensation as an expense in the financial statements. However, after receiving pressure from members of Congress and the SEC, the FASB decided only to encourage, but not require, companies to include stock option pay as an expense. For 1997 financial statements, a company is required to disclose in a footnote the earnings it would have reported after deducting stock options.

The Senate Finance Committee is expected to begin its hearings on the legislation in October. For a copy of the AICPA's comments to Congress, dial from a fax machine 201-938-3787 and request document no. 926.